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United States Government Accountability Office

GAO

Report to Congressional Committees

June 2009

TROUBLED ASSET
RELIEF PROGRAM
June 2009 Status of
Efforts to Address
Transparency and
Accountability Issues

GAO-09-658

June 2009

TROUBLED ASSET RELIEF PROGRAM
Accountability Integrity Reliability

Highlights

June 2009 Status of Efforts to Address Transparency
and Accountability Issues

Highlights of GAO-09-658, a report to
congressional committees

Why GAO Did This Study

What GAO Found

GAO’s fifth report on the Troubled
Asset Relief Program (TARP)
follows up on prior
recommendations. It also reviews
(1) activities that had been initiated
or completed under TARP as of
June 12, 2009; (2) the Department
of the Treasury’s Office of
Financial Stability’s (OFS) hiring
efforts and use of contractors; and
(3) TARP performance indicators.
To do this, GAO reviewed signed
agreements and other relevant
documentation and met with
officials from OFS, contractors,
and financial regulators.

As of June 12, 2009, Treasury had disbursed $330 billion of the roughly $700
billion in TARP funds (see table below). Most of the funds ($200 billion) went
to purchase preferred shares and subordinated debentures of 623 financial
institutions under the Capital Purchase Program (CPP), which continues to be
OFS’s primary vehicle for stabilizing financial markets. At the same time that
Treasury continues to purchase preferred shares in institutions, others have
paid about $1.9 billion to repurchase shares and Treasury announced that it
expects to receive approximately $68 billion from CPP repurchases later in
June 2009. Unlike the capital purchase process, Treasury, in conjunction with
primary federal regulators, has yet to share criteria used to evaluate
repurchase requests. Treasury also has provided only limited information
about the actual warrant repurchase process resulting in questions about
whether it is getting the best price for taxpayers.
Status of TARP Funds as of June 12, 2009
Dollars in billions

What GAO Recommends
GAO makes 5 recommendations,
including that Treasury improve
disclosure of the warrant
repurchase process, fully
implement a communication
strategy that ensures that all key
congressional stakeholders are
kept up to date about TARP, and in
consultation with the primary
federal regulators, ensure
consideration of generally
consistent criteria to evaluate
repurchase requests. GAO also
recommends that the Federal
Reserve consider providing certain
aggregate information related to
the stress tests to the public and
OFS in particular.
Treasury described the steps it has
taken since our March report. The
Federal Reserve said that GAO’s
recommendation was operationally
difficult and the information
reported would be potentially
misleading. GAO continues to see
value in reporting aggregate trend
information.
View GAO-09-658 or key components.
For more information, contact Thomas
McCool at (202) 512-2642 or
mccoolt@gao.gov.

Treasury’s current
projected use of
a
funds

Capital Purchase Program
Targeted Investment Program

Disbursed

$218.0

Program

$199.5

40.0

40.0

TBD

b

TBD

Systemically Significant Failing Institutions

70.0

41.2

Asset Guarantee Program

12.5

0.0

Automotive Industry Financing Program

82.6

49.2

Making Home Affordable

50.0

0.0

70.0

0.1

Capital Assistance Program

Consumer and Business Lending Initiative
Public Private Investment Program
Totals

c

100.0

0.0

$643.1

$330.0

Source: Treasury OFS, unaudited.
a

Amounts represent Treasury’s most recent projected funding level. Portions of Treasury’s projected
use of funds are not yet legal obligations.
b
Treasury has announced the Capital Assistance Program but has not yet projected its funding level.
c
The Consumer and Business Lending Initiative now includes the Term Asset-Backed Securities Loan
Facility and the Small Business and Community Lending Initiative.

Treasury continued to operationalize its more recent programs, including the
Capital Assistance Program (CAP). As part of this program, the Federal
Reserve led the stress tests of the largest 19 U.S. bank holding companies,
which revealed that about half needed to raise additional capital to keep them
strongly capitalized and lending even if economic conditions worsen.
Whether any of the institutions will have to participate in CAP has yet to be
determined. While the Federal Reserve disclosed the stress test results, it has
no plans to disclose information about the 19 institutions going forward. What
information, if any, is disclosed will be left to the discretion of the affected
institutions raising a number of concerns including potentially inconsistent or
only selected information being disclosed. Moreover, the Federal Reserve had
not developed a mechanism to share information with OFS about the ongoing
United States Government Accountability Office

Highlights of GAO-09-658 (continued)

condition of the 19 bank holding companies that
continue to participate in TARP programs.

GAO again notes the difficulty of measuring the effect
of TARP’s activities. As shown in the table below, some
indicators suggest general improvements in various
markets since our March 2009 report, although the cost
of credit has risen in some cases. Specifically, the Baa
corporate bond rate and LIBOR have declined but
mortgage and Aaa bond rates have risen. However,
perceptions of risk in credit markets (as measured by
premiums over Treasury securities) have decreased in
interbank, mortgage, and corporate bond markets,
while total mortgage originations have increased.
Empirical analysis of the interbank market, which
showed signs of significant stress in 2008, suggests that
the CPP and programs outside of the TARP announced
in October of 2008 resulted in a statistically significant
improvement in risk spreads even when other
important factors were considered. In addition,
although Federal Reserve survey data suggest that
lending standards remained tight, collectively the
largest CPP recipients extended roughly $260 billion on
average each month in new loans to consumers and
businesses in the first quarter of 2009, according to the
Treasury’s loan survey. However, attributing any of
these changes directly to TARP continues to be
problematic because of the range of actions that have
been and are being taken to address the current crisis.
While these indicators may be suggestive of TARP’s
ongoing impact, no single indicator or set of indicators
can provide a definitive determination of the program’s
impact.

According to Treasury, its Financial Stability Plan has
provided a basis for its communication strategy.
Treasury plans to more regularly communicate with
congressional committees of jurisdiction about TARP.
However, until this strategy is fully implemented, all
congressional stakeholders will not be receiving
information in a consistent or timely manner. A key
component of the communication strategy is the new
www.financialstability.gov Web site. While a goal of
the new site is to provide the public with a more user
friendly format, Treasury has not yet measured the
public’s satisfaction with the site.
OFS has made progress in establishing its management
infrastructure. Continued attention to hiring remains
important because some offices within OFS, including
the Office of the Chief Risk and Compliance Officer,
continue to have a number of vacancies that will need
to be filled as TARP programs are fully implemented.
Treasury has also continued to build a network of
contractors and financial agents to support TARP
administration and operations. These contracts and
agreements are key tools OFS has used to help develop
and administer its TARP programs. Treasury has
provided information to the public on procurement
contracts and financial agency agreements, but has not
included a breakdown of cost data by each entity. As a
result, Treasury is missing an opportunity to provide
additional transparency about TARP operations.
Select Credit Market Indicators
Credit market rates and spreads
Indicator

LIBOR
TED Spread
Aaa bond rate
Aaa bond spread
Baa bond rate
Baa bond spread
Mortgage rates
Mortgage spread

Basis point change since GAO
March 2009 report

Basis point change since
October 13, 2008

Down 38

Down 388

Down 57

Down 407

Rate on highest quality corporate bonds
Spread between Aaa bond rate and 10-year
Treasury yield
Rate on corporate bonds subject to
moderate credit risk
Spread between Baa bond rate and 10-year
Treasury yield

Up 22

Down 62

Down 101

Down 61

Down 84

Down 108

Down 207

Down 107

30-year conforming loans rate
Spread between 30-year conforming loans
rate and 10-year Treasury yield

Up 61

Down 87

Down 53

Down 74

Description
3-month London interbank offered rate,
LIBOR (an average of interest rates offered
dollar-denominated loans)
Spread between 3-month LIBOR and 3month Treasury yield

Quarterly mortgage volume and defaults
Indicator

Description

Change from December 31, 2008 to March 31, 2009 (latest available data)

Mortgage originations

New mortgage loans

Up $185 billion to $445 billion

Foreclosure rate

Percentage of homes in foreclosure

Up 55 basis points to 3.85 percent

Source: GAO analysis of data from Global Insight, Thomson Datastream, and Inside Mortgage Finance.

United States Government Accountability Office

Contents

Letter

1
Scope and Methodology
Background
Treasury Has Established Its Core Programs under TARP but
Continues to Finalize Some Details
Treasury Has Made Progress in Developing OFS’s Management
Infrastructure
Indicators Generally Suggest Positive Developments in Credit
Markets, but Isolating the Impact of TARP Continues to Present
Challenges
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

68
80
84
85

Appendix I

Comments from the Department of the Treasury

89

Appendix II

Status of Prior GAO Recommendations

91

Appendix III

Econometric Analysis of TED Spread

93

Appendix IV

Overview of Treasury’s CPP Repurchase Process

95

Appendix V

Synopsis of Citigroup’s Financial Condition

99

Appendix VI

GAO Contacts and Staff Acknowledgments

106

Related GAO Products

2
8
10
53

107

Page i

GAO-09-658 Troubled Asset Relief Program

Tables
Table 1: Status of TARP Funds as of June 12, 2009
Table 2: TARP Dividend Payments Received as of June 12, 2009
Table 3: Capital Investments Made through the Capital Purchase
Program as of June 12, 2009
Table 4: Average Processing Days Reported by the Federal
Reserve, OTS, OCC and Treasury of CPP Applications, as
of May 15, 2009
Table 5: Capital Purchase Program Repurchases, as of June 12,
2009
Table 6: Estimated Losses for the 19 U.S. Bank Holding Companies
in SCAP, January 2009 through December 2010
Table 7: Capital Raising Requirements SCAP Bank Holding
Companies, as of June 12, 2009
Table 8: Amount of TALF Loans Requested from March through
June 2009 by Loan Type
Table 9: U.S. Treasury Assistance to the Auto Industry
Table 10: Number of Permanent Staff and Detailees, as of June 8,
2009
Table 11: Description of Financial Disclosure Reports Filed by OFS
Employees
Table 12: TARP Contracts, Financial Agency Agreements, and
Subcontracts with Minority-Owned, Women-Owned, and
Other Small Businesses, as of June 1, 2009
Table 13: Select Credit Market Indicators, as of June 12, 2009
Table 14: New Lending at the 21 Largest CPP Recipients, First
Quarter of 2009, by Institution

12
14
16

19
24
31
33
37
43
55
58

64
72
77

Figures
Figure 1: Timeline of Major TARP Events from March 24, 2009,
through June 12, 2009
Figure 2: Equity Ownership in Chrysler and GM after Restructuring
Figure 3: Number of Permanent Staff and Detailees, November 21,
2008, through June 8, 2009
Figure 4: Number of and Expenses for OFS Contracts and
Agreements, as of June 1, 2009
Figure 5: Mortgage Applications and Originations, First Quarter of
2004 through First Quarter of 2009
Figure 6: Total New Lending at the 21 Largest Recipients of CPP,
from October 1, 2008, through March 2009

Page ii

10
45
54
65
75
76

GAO-09-658 Troubled Asset Relief Program

Figure 7: Average Finance Rate for New Cars at Auto Finance
Companies and Banks, from February 1, 2006, through
March 2009
Figure 8: Treasury’s Repurchase Process
Figure 9: Net Income (Loss) of the Four Largest U.S. Bank Holding
Companies, First Quarter of 2007 through First Quarter of
2009
Figure 10: Market Value of Equity (Common) as Percentage of
Total Assets of the Four Largest U.S. Bank Holding
Companies, First Quarter of 2007 through First Quarter of
2009
Figure 11: The Ratio of Debt to Equity of the Four Largest U.S.
Bank Holding Companies, First Quarter of 2007 through
First Quarter of 2009
Figure 12: Tier 1 Risk-Based Capital Ratio of the Four Largest U.S.
Bank Holding Companies, First Quarter of 2007 through
First Quarter of 2009
Figure 13: Tier 1 Leverage Capital Ratio of the Four Largest Bank
Holding Companies, First Quarter of 2007 through First
Quarter of 2009
Figure 14: Selected Problem Assets as a Percentage of Tier 1
Capital and Loan Loss Allocation, First Quarter of 2007
through First Quarter of 2009

Page iii

79
96

100

101

102

103

104

105

GAO-09-658 Troubled Asset Relief Program

Abbreviations
ABS
AGP
AIFP
AIG
ALLL
ARRA
CAP
CDFI
CMBS
CPP
FDIC
FMV
GM
GMAC
HAC
HAMP
LIBOR
OCC
OFS
OGE
OMB
OTS
PBGC
PPIP
SBA
SCAP
SSFI
TALF
TARP
TIP
VEBA

Page iv

asset-backed security
Asset Guarantee Program
Automotive Industry Financing Program
American International Group Inc.
allowance for loan and lease losses
American Recovery and Reinvestment Act of
2009
Capital Assistance Program
Community Development Financial
Institution Funds
commercial mortgage-backed security
Capital Purchase Program
Federal Deposit Insurance Corporation
fair market value
General Motors Corporation
GMAC LLC
Heteroskedasticity and AutocorrelationConsistent
Home Affordable Modification Program
London Interbank Offered Rate
Office of the Comptroller of the Currency
Office of Financial Stability
Office of Government Ethics
Office of Management and Budget
Office of Thrift Supervision
Pension Benefit Guaranty Corporation
Public Private Investment Program
Small Business Administration
Supervisory Capital Assessment Program
Systemically Significant Failing Institutions Program
Term Asset-Backed Securities Loan Facility
Troubled Asset Relief Program
Targeted Investment Program
voluntary employee beneficiary associations

GAO-09-658 Troubled Asset Relief Program

This is a work of the U.S. government and is not subject to copyright protection in the
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Page v

GAO-09-658 Troubled Asset Relief Program

United States Government Accountability Office
Washington, DC 20548

June 17, 2009
Congressional Committees
On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(the act) was signed into law. The act established the Office of Financial
Stability (OFS) within the Department of the Treasury (Treasury) and
authorized the Troubled Asset Relief Program (TARP). 1 Among other
things, the act, as amended, provides Treasury with broad, flexible
authorities to buy or guarantee billions in troubled assets, which include
mortgages and mortgage-related instruments, and any other financial
instrument whose purchase Treasury determines is needed to stabilize the
financial markets. 2
The act also created oversight mechanisms to oversee the implementation
and operations of TARP. These include a requirement that the U.S.
Comptroller General report at least every 60 days on (1) findings resulting
from oversight of TARP’s performance in meeting the purposes of the act;
(2) the financial condition and internal controls of TARP, its
representatives, and agents; (3) the characteristics of both asset purchases
and the disposition of assets acquired, including any related commitments
that are entered into; (4) TARP’s efficiency in using the funds appropriated
for the program’s operation; (5) TARP’s compliance with applicable laws
and regulations; efforts to prevent, identify, and minimize conflicts of
interest of those involved in TARP’s operations; and (6) the efficacy of
contracting procedures. 3 In order to eliminate unnecessary duplication of
effort, we have continued to coordinate our work with entities created
under the act who also were assigned oversight responsibilities for TARP,
including the Congressional Oversight Panel, the Financial Stability
Oversight Board (FinSOB), and the Special Inspector General for TARP
(SIGTARP).

1

Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et seq.

2

The act originally authorized Treasury to buy or guarantee up to $700 billion in troubled
assets. The Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, Div. A,
amended the act and reduced the maximum allowable amount of outstanding troubled
assets under the act by almost $1.3 billion, from $700 billion to $698.741 billion. Section 102
of the act, 12 U.S.C. § 5212, authorizes Treasury to guarantee troubled assets originated or
issued prior to March 14, 2008, including mortgage-backed securities.

3

Section 116 of the act, 12 U.S.C. § 5226.

Page 1

GAO-09-658 Troubled Asset Relief Program

This report follows up on the status of recommendations from our
previous reports and addresses (1) the nature and purpose of activities
that have been initiated or completed under TARP from March 27, through
June 12, 2009, unless otherwise noted; (2) OFS’s progress in hiring staff
and use of contractors; and (3) outcomes measured by indicators of
TARP’s performance. 4

Scope and
Methodology

To determine the nature and purpose of TARP activities from March 27,
2009, through June 12, 2009, unless noted otherwise, and the status of
actions taken in response to our recommendations from our March 2009
report, we reviewed documents from OFS that described the amounts,
types, and terms of Treasury’s purchases of senior preferred stocks,
subordinated debt, and warrants under the Capital Purchase Program
(CPP). We also reviewed documentation and interviewed officials from
OFS who were responsible for approving financial institutions to
participate in CPP and overseeing the repurchase process for CPP
preferred stock and warrants. 5 Additionally, we contacted officials from
the four federal banking regulators—the Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller of the Currency (OCC),
the Board of Governors of the Federal Reserve System (Federal Reserve),
and the Office of Thrift Supervision (OTS)—to obtain information on their
process for reviewing CPP applications, the status of pending applications,
their process for reviewing preferred stock and warrant repurchase
requests, and their examination process for reviewing recipients’ lending
activities and compliance with TARP requirements.
To update the status of the Targeted Investment Program (TIP), the
Systemically Significant Failing Institutions Program (SSFI), and the
Automotive Industry Financing Program (AIFP), we reviewed relevant
documents and interviewed OFS officials about these programs. We also

4

See GAO, Troubled Asset Relief Program: Additional Actions Needed to Better Ensure
Integrity, Accountability, and Transparency, GAO-09-161 (Washington, D.C.: Dec. 2,
2008); Troubled Asset Relief Program: Status of Efforts to Address Transparency and
Accountability Issues, GAO-09-296 (Washington, D.C.: Jan. 30, 2009); Troubled Asset Relief
Program: March 2009 Status of Efforts to Address Transparency and Accountability
Issues, GAO-09-504 (Washington, D.C.: Mar. 31, 2009); and Auto Industry: Summary of
Government Efforts and Automakers’ Restructuring to Date, GAO-09-553 (Washington,
D.C.: Apr. 23, 2009). See appendix II for status of all prior recommendations.
5

A warrant is an option to buy shares of common stock or preferred stock at a
predetermined price on or before a specified date.

Page 2

GAO-09-658 Troubled Asset Relief Program

met with Federal Reserve officials to discuss the stress test methodology
and results for the 19 largest U.S. bank holding companies and reviewed
related documents relevant to the Capital Assistance Program (CAP).
To provide an update on the Federal Reserve’s Term Asset-Backed
Securities Loan Facility (TALF) and its efforts related to small business
securitizations—and in consideration of GAO’s statutory limitations on
auditing certain functions of the Federal Reserve—we reviewed publicly
available information on the Web sites of the Federal Reserve and the
Federal Reserve Bank of New York that had been made available since our
March 2009 report. We also interviewed officials in OFS for updates to
TALF. 6 For updates to Public Private Investment Program (PPIP) and
small business efforts related to its Consumer and Business Lending
Initiative, we reviewed agency documentation and interviewed Treasury
and FDIC officials. For updates on the Small Business Administration
(SBA) efforts related to improving credit and securitization markets for
small businesses, we relied on previously issued GAO work. 7
To determine Treasury’s progress in developing an overall
communications strategy for TARP, we assessed Treasury’s activities
based on GAO reports on effective communications. 8 We also accessed
www.financialstability.gov—Treasury’s new Web site for communication

6
The Federal Banking Agency Audit Act limits GAO’s authority to audit certain Federal
Reserve activities. Specifically, GAO audits of the Federal Reserve generally may not
include monetary policy matters, including discount window operations and open market
operations. This prohibition limits GAO’s ability to audit the Federal Reserve Board’s
actions taken with respect to TALF. The Helping Families Save Their Homes Act of 2009,
Pub. L. No. 111-22, enacted on May 20, 2009, amended the Federal Banking Agency Audit
Act to provide GAO authority to audit Federal Reserve Board actions taken under section
13(3) of the Federal Reserve Act with respect to a single and specific partnership or
corporation. Among other things, this amendment provides GAO with authority to audit
Federal Reserve actions taken with respect to three entities also assisted under TARP—
Citigroup, Inc., American International Group, Inc., and Bank of America Corporation—but
does not provide GAO with authority to audit Federal Reserve monetary policy actions
taken with respect to TALF.
7

See GAO, Small Business Administration’s Implementation of Administrative
Provisions in the American Recovery and Reinvestment Act of 2009, GAO-09-507R
(Washington, D.C.: Apr. 16, 2009).
8
See GAO, Financial Literacy and Education Commission: Progress Made in Fostering
Partnerships, but National Strategy Remains Largely Descriptive Rather Than Strategic,
GAO-09-638T (Washington, D.C.: April 29, 2009) and Securities Investor Protection: Update
on Matters Related to the Securities Investor Protection Corporation, GAO-03-811
(Washington, D.C.: July 11, 2003).

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GAO-09-658 Troubled Asset Relief Program

of TARP-related strategies—through June 4, 2009. Further, we interviewed
officials from OFS and Treasury’s Office of Public Affairs to determine
what steps Treasury had taken to coordinate communications with the
public and Congress.
To determine the status of OFS’s efforts to hire staff to administer TARP
duties, we reviewed OFS’s organizational chart, documents on staff
composition and workforce planning, Treasury’s most recent budget
proposal submission to the Office of Management and Budget (OMB), and
OFS vacancy announcements posted on www.financialstability.gov and
www.USAjobs.gov from March 31, 2009, to June 8, 2009. We also reviewed
our prior work on human capital flexibilities and strategic workforce
planning to assess OFS’s performance in these areas. In addition, we met
with a variety of Treasury and OFS officials to discuss the staffing levels of
OFS offices including vacancies, their processes for recruiting employees
with the skill sets and competencies needed to administer TARP, steps
taken to find permanent replacements to fill key leadership positions, and
the extent of pay comparability challenges. We also met with officials from
the Office of Personnel Management to discuss their coordination with
Treasury in establishing hiring flexibilities and other tools to staff OFS.
To assess OFS’s process for vetting employees’ potential conflicts of
interest, we reviewed information from Treasury’s databases used to track
submission and reviews of Treasury employees’ confidential and public
financial disclosure reports. Specifically, we reviewed information in the
databases for 64 OFS employees hired as of April 23, 2009. Of these, 56
were permanent employees required to submit confidential financial
disclosure reports and 8 were senior-level officials required to submit
public disclosure reports. 9 In order to determine the reliability of the
information provided in the databases, we interviewed Treasury officials
and performed basic tests on the data. We determined that the information
provided for these 64 employees was sufficiently reliable for our purposes.
We also reviewed standard operating procedures that Treasury developed
to manage the submissions and reviews of its employees’ financial

9

Although Treasury had entered information in the tracking database for 15 senior-level
officials required to complete public financial disclosure reports, information for 7 of these
individuals did not reflect the dates that the forms were submitted to and reviewed by
Treasury in response to their appointment to OFS. This occurred because these individuals
had already submitted forms during the past fiscal year to their former federal employers
and so the dates entered reflect their original submission and review dates in their formerly
held positions during 2008.

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GAO-09-658 Troubled Asset Relief Program

disclosure reports and new internal operating procedures developed
specifically for reviewing OFS employees’ confidential financial disclosure
reports. In coordination with GAO experts on federal ethics laws and
regulations, we reviewed information provided by 15 senior-level OFS
officials in public financial disclosure reports and identified any potential
conflicts meriting additional discussion with Treasury ethics counsel. In
addition, we met with Treasury and OFS officials to discuss their reviews
of financial disclosure reports and the training provided to OFS staff on
the laws and regulations pertaining to ethical conduct in the federal
workplace, including those related to conflicts of interest. We met with
officials from the Office of Government Ethics (OGE) to discuss pertinent
ethics regulations that applied to Treasury and reviewed their guidance on
ethical standards of conduct for employees. 10 We also reviewed reports
published by Treasury’s Office of the Inspector General describing
conflicts of interest incidents and their resolution.
To assess OFS’s use of contractors and financial agents to support TARP
administration and operations for the period of March 14 through June 1,
2009, we reviewed information from Treasury for (1) new financial agency
agreements, contracts, blanket purchase agreements, and interagency
agreements; and (2) task orders, modifications, and amendments involving
ongoing contracts and agreements. We analyzed this information, in part,
to identify small or minority- and women-owned prime contractors and
subcontractors providing TARP services and supplies. To report OFS
expenses for contracts and agreements, we obtained information from the
OFS Chief Financial Officer. To identify the extent to which federal
banking regulators use contractors to support their TARP activities, we
obtained information from FDIC, Federal Reserve, OCC, and OTS. To
assess the status of OFS progress in developing a final TARP conflicts-ofinterest rule and responding to our prior recommendations to
(1) complete reviews of vendor conflicts-of-interest mitigation plans to
conform with the interim rule and to (2) issue guidance requiring key
communications and decisions be documented, we interviewed officials
from Treasury and reviewed applicable documents.
To assess the status of internal controls related to TARP activities and the
status of TARP’s consideration of accounting and reporting topics, we

10
The Office of Government Ethics is an executive branch agency that exercises leadership
in the executive branch to prevent conflicts of interest on the part of government
employees and to resolve conflicts of interest that do occur.

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GAO-09-658 Troubled Asset Relief Program

reviewed documents provided by OFS and conducted interviews and made
inquiries with officials from OFS, including the Chief Financial Officer,
Deputy Chief Financial Officer, Deputy Chief Risk Officer, Cash
Management Officer, Director of Internal Controls, and their
representatives. To evaluate selected internal control activities related to
the CPP, AIFP, and SSFI programs, we designed tests using OFS’s process
flows, narratives, risk matrices, and high-level operational procedures. As
part of our ongoing work, we completed the following additional activities:
•

For CPP, we tested certain internal control activities related to dividend
payments received through June 12, 2009, from institutions included in our
previous sample of 45 unique preferred stock purchase transactions for
the four months ended January 31, 2009. To make that selection, we used a
monetary unit sampling (probability proportionate to size) methodology.
We also tested dividends received through June 12, 2009, for TIP, Asset
Guarantee Program (AGP), and AIFP.

•

For SSFI, we tested selected control activities, including approvals,
reviews, and closing documentation, for the American International Group
Inc. (AIG) restructuring. The documentation that we reviewed included an
exchange agreement and purchase agreement executed on April 17, 2009.

•

For AIFP, we tested controls over the (1) authorization and execution of
the initial General Motors Corporation (GM) and Chrysler LLC (Chrysler)
agreements (executed on December 31, 2008, and January 2, 2009,
respectively), (2) funding process, (3) receipt of promissory notes and
securities, (4) disbursements made by Treasury under the agreements, and
(5) receipts of interest and principal. In addition, we verified that the loan
amounts disbursed to and interest received from GM and Chrysler were
consistent with the terms of the agreements.
Finally, in our initial report under the mandate, we identified a preliminary
set of indicators on the state of credit and financial markets that might be
suggestive of the performance and effectiveness of TARP. 11 We consulted
Treasury officials and other experts and analyzed available data sources
and the academic literature. We selected a set of preliminary indicators
that offered perspectives on different facets of credit and financial
markets, including perceptions of risk, cost of credit, and flows of credit to

11

GAO-09-161.

Page 6

GAO-09-658 Troubled Asset Relief Program

businesses and consumers. 12 We assessed the reliability of the data upon
which the indicators were based and found that, despite certain
limitations, they were sufficiently reliable for our purposes. To update the
indicators in this report, we primarily used data from Thomson
Datastream—a financial statistics database. As these data are widely used,
we conducted only a limited review of the data but ensured that the trends
we found were consistent with other research. We also relied on data from
Inside Mortgage Finance, Treasury, the Federal Reserve, the Chicago
Board Options Exchange, and Global Insight. We have relied on data from
these sources for past reports and determined that, considered together,
these auxiliary data were sufficiently reliable for the purpose of presenting
and analyzing trends in financial markets. The data from Treasury’s survey
of lending to the top 21 CPP recipients (as of March 31, 2009) are based on
internal reporting from participating institutions, and the definitions of
loan categories may vary across banks. Because the data are unique, we
are not able to benchmark the origination levels against historical lending
or seasonal patterns at these institutions. Based on discussions with
Treasury and our review of the data, we found that the data were
sufficiently reliable for the purpose of documenting trends in lending. The
survey data will prove valuable for more thorough analyses of lending
activity in future reports. We also conducted an econometric analysis to
assess the impact of CPP on the TED spread. Although we used a standard
and widely used methodology, the model results should be interpreted
with caution because we did not attempt to capture all potential factors
that might explain movements in the TED spread. Moreover, in spite of the
empirical evidence, we cannot link improvements in the TED spread
exclusively to CPP (see app. III for more detail).
We conducted this performance audit from April 2009 through June 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.

12
No indicator on its own provides a definitive perspective on the state of markets;
collectively, the indicators should provide a broad sense of stability and liquidity in the
financial system and could be suggestive of the program’s impact. However, it is difficult to
draw conclusions about causality because a variety of actions that have been taken to
address the economic downturn.

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GAO-09-658 Troubled Asset Relief Program

Since its creation, OFS has implemented numerous programs and
initiatives to carry out TARP. According to Treasury, the purpose of each
program is as follows:

Background
•

CPP was created in October 2008 to stabilize the financial system by
providing capital to viable banks through the purchase of preferred shares
and subordinated debentures. In return for its investment, the Treasury
will receive dividend payments and warrants.

•

TIP was created in January 2009 to foster market stability and thereby
strengthen the economy by making case-by-case investments in
institutions that Treasury deems are critical to the functioning of the
financial system.

•

AGP was created in November 2008 to provide government assurances for
assets held by financial institutions that are viewed as critical to the
functioning of the nation’s financial system.

•

SSFI was created in November 2008 to provide stability in financial
markets and avoid disruptions to the markets from the failure of a
systemically significant institution. Treasury determines participation in
this program on a case-by-case basis.

•

AIFP was created in December 2008 to prevent a significant disruption of
the American automotive industry. Treasury has determined that such a
disruption would pose a systemic risk to financial market stability and
have a negative effect on the U.S. economy. The program requires
participating institutions to implement plans that will achieve long-term
viability.

•

Auto Supplier Support Program was created in March 2009 to help
stabilize the auto supply base, which designs and builds the components
for cars and trucks.

•

Making Home Affordable Program was created in March 2009 to offer
assistance to as many as 7 to 9 million homeowners. The program aims to
prevent the destructive impact of the housing crisis on families and
communities. According to Treasury, it will not provide money to
speculators, but will target support to the working homeowners who have
made every possible effort to stay current on their mortgage payments. 13

13

The Making Home Affordable program will be the focus of a future GAO report.

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GAO-09-658 Troubled Asset Relief Program

•

Consumer and Business Lending Initiative created in March 2009 is an
initiative under the Financial Stability Plan that includes the Federal
Reserve-run TALF. This initiative is intended to support consumer and
business credit markets by providing financing to private investors to issue
new securitizations to help unfreeze and lower interest rates for auto,
student, and small business loans; credit cards; commercial mortgages;
and other consumer and business credit. Subsequently, it subsumed the
Small Business and Community Lending Initiative, which was also created
in March 2009 to increase credit available to local businesses by reducing
fees and increasing guarantees for SBA loans and having Treasury
purchase securities backed by SBA loans.

•

CAP was created in February 2009 to restore confidence throughout the
financial system that the nation’s largest banking institutions have
sufficient capital to cushion themselves against larger-than-expected
future losses, and to support lending to creditworthy borrowers.

•

PPIP was established in March 2009 to address the challenge of “legacy
assets” as part of Treasury’s efforts to repair balance sheets throughout
the financial system and increase the availability of credit to households
and businesses. In conjunction with the FDIC, Treasury established the
Legacy Loans Programs component of PPIP.
Since our March 2009 report, a number of major TARP-related events have
occurred (see fig. 1).

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Figure 1: Timeline of Major TARP Events from March 24, 2009, through June 12, 2009
5/31: Treasury releases fact sheet
on General Motors restructuring.

5/15: Treasury releases its
monthly bank lending survey
with information from the top
21 financial institutions
participating in the CPP.

4/15: Treasury releases its monthly
bank lending survey with information
from the top 21 financial institutions
participating in the CPP.
4/14: Treasury
releases term sheet
for mutual banks
applying to CPP that
do not have holding
companies.

5/19: Treasury announces
confirmation of Neal S.
Wolin as Deputy
Secretary of the Treasury.

5/7: Stress test results are
announced and the
Treasury Secretary
releases a statement
announcing his hopes that
the release of results leads
to increased bank lending.

4/22: Treasury
announces selection of
three firms to serve as
asset managers for CPP
and other programs.

5/21: Treasury
announces that it has
made an investment of
$7.5 billion in GMAC
LLC to facilitate loan
originations to
Chrysler dealers and
consumers and
support GMAC’s
capital needs.

6/10: Treasury releases interim
final rule on TARP standards for
compensation and corporate
governance including limits on
employee compensation at TARP
institutions, appointment of a
special master to review
compensation plans at institutions
receiving exceptional assistance,
implementation of Recovery Act
provisions related to TARP
employee compensation, and
additional compensation and
governance standards for
accountability and disclosure.

2009
April

4/6: Treasury
releases
additional
guidance for
potential
investors into
PPIP and
extends the
deadline for
application.

May

5/14: Treasury Secretary Geithner and HUD Secretary
Donovan announce new initiatives of the Making Housing
Affordable Program: foreclosure alternatives, and home price
decline protection incentives.

4/8: Treasury releases a statement
following the launch by Chrysler LLC’s
and General Motors Corporation’s Auto
Supplier Support Programs.

4/30: The administration announces an
agreement for Chrysler to partner with
international car company Fiat.

4/7: Treasury releases three term
sheets for qualifying financial
institutions applying to CPP that
are mutual holding companies.

June

4/29: Treasury announces receipt of more than
100 applications for fund manager positions of
PPIP’s Legacy Securities.

4/28: The administration releases details of new initiatives under the Making
Home Affordable program that lower payments made on second mortgages
and assist underwater borrowers in retaining their homes.

6/1: Treasury releases
its first CPP Monthly
Lending Report which
includes information on
outstanding balances
on consumer loans,
commercial loans and
total loans of all CPP
participants.

6/9: Treasury announces
that 10 of the largest CPP
financial institutions are
eligible to repay about
$68 Billion to Treasury.
6/4: Treasury releases the
opening statement of
Herbert M. Allison, nominee
for Assistant Secretary for
Financial Stability, before the
Senate Committee on
Banking, Housing, and
Urban Affairs.

Source: GAO.

Treasury Has
Established Its Core
Programs under
TARP but Continues
to Finalize Some
Details

As of June 12, 2009, Treasury projected that it had used $643.1 billion of its
almost $700 billion limit for TARP. Highlights of the transactions and
activities under the various programs include the following:
•

CPP continues to be one of OFS’s most active programs with OFS
continuing to deploy funds and other participants beginning to repay
investments.

•

While OFS has hired asset mangers, it has yet to clearly identify what role
the asset managers will have in monitoring compliance.

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GAO-09-658 Troubled Asset Relief Program

•

The Federal Reserve announced the results of the stress test under CAP,
for which Treasury extended the deadline for applications through
November 9, 2009. As of June 8, 2009, no applications had been submitted.

•

The Federal Reserve announced a number of modifications to TALF and
has completed a number of fundings since March 2009.

•

OFS and FDIC took additional steps to implement the PPIP’s Legacy Loans
Program, but postponed a previously planned pilot sale of assets by open
banks.

•

Treasury, in conjunction with the Federal Reserve and SBA, has also
announced additional efforts to provide more accessible and affordable
credit to small businesses.

•

Citigroup, Inc. (Citigroup) expanded its request to convert preferred
securities and trust preferred securities for common stock from $27.5
billion to $33 billion and finalized the exchange agreement on Jun 9, 2009,
but the conversion had not been completed as of June 12, 2009.

•

OFS finalized a $30 billion equity facility with AIG under SSFI and
restructured AIG’s existing preferred stock from cumulative to
noncumulative shares but did not require additional concessions from AIG
counterparties.

•

OFS provided an additional $44 billion in assistance to Chrysler and GM
under AIFP.
Finally, consistent with our recommendations, Treasury has continued to
take steps to develop an integrated communication strategy for TARP, but
we continue to identify areas that warrant ongoing attention and
consideration.

Treasury Has Disbursed
Almost Half the TARP
Limit

As of June 12, 2009, Treasury had disbursed about $330 billion in TARP
funds, approximately $200 billion of them for CPP (table 1).

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Table 1: Status of TARP Funds as of June 12, 2009
Dollars in billions

Program
Capital Purchase Program

Treasury’s
current projected
use of fundsa

Apportioned Disbursed

Asset
purchase
priceb

$218.0

$218.0

$199.5

$199.5

40.0

40.0

40.0

40.0

TBDc

TBD

TBD

TBD

Systemically Significant
Failing Institutions

70.0

70.0

41.2

69.8

Asset Guarantee Program

12.5

5.0

0.0

5.0

Targeted Investment
Program
Capital Assistance
Program

Automotive Industry
d
Financing Program

82.6

93.7

49.2

85.0

Making Home Affordable

50.0

32.5

0.0

18.3

Consumer and Business
e
Lending Initiative

70.0

20.0

0.1

20.0

Public Private Investment
Program
Totals

100.0

0.0

0.0

0.0

$643.1

$479.2

$330.0

$437.6
$1.9f

Less repurchases
Total asset purchase
price

$435.7

Source: Treasury OFS, unaudited.
a

The amounts represent Treasury’s most recent projected funding level. Portions of Treasury’s
projected use of funds are not yet legal obligations. Projected funds may differ from the original
announced maximum program funding level. For example, Treasury originally announced a maximum
funding level of $250 billion for CPP but now projects that it will not exceed $218 billion.

b

The Asset Purchase Price reflects the aggregate amount Treasury agreed to pay to purchase
outstanding troubled assets that are subject to the almost $700 billion purchase limit in section 115 of
the Emergency Economic Stabilization Act. This amount includes the aggregate amount of
outstanding guarantees made by Treasury, even though Treasury has not disbursed any cash to
honor a guarantee. For example, AGP’s asset purchase price includes the $5 billion Citigroup
guarantee, even though no cash has been disbursed to Citigroup through this program. However, as
required under section 102 of the act, it does not include a subtraction from the outstanding
guarantee amount to reflect the balance in the Troubled Assets Insurance Financing Fund.
c

Treasury has announced CAP but has not yet projected its funding level.

d

Treasury's current projected use of funds is less than the apportionment and asset purchase price for
AIFP because Treasury expects to disburse less money than originally anticipated.

e

The Consumer and Business Lending Initiative now includes TALF and the Small Business and
Community Lending Initiative.

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GAO-09-658 Troubled Asset Relief Program

f

Repurchases represent the amounts received from CPP participant institutions that repurchased
preferred shares from Treasury. Repurchases exclude any amounts relating to private institutions’
repurchases of preferred shares obtained through the exercise of warrants and public institutions’
repurchases of warrants.

Officers and employees of Treasury may not obligate or expend
appropriated funds in excess of the amount apportioned by OMB on behalf
of the President. Treasury stated that as of June 12, 2009, OMB had
apportioned about $479.2 billion of the funding levels announced for
TARP. Given this information, it appears that Treasury has not exceeded
the troubled asset purchase limit or obligated funds in excess of those
OMB has apportioned. We are continuing to obtain additional information
from Treasury and review the controls that Treasury has in place to help
ensure compliance with the funding restrictions.
In addition, beginning in April 2009, the budgetary costs of TARP asset
purchases, loans, and loan guarantees since the inception of the program
represent the net present value of estimated cash flows to and from the
government, excluding administrative costs. 14 OFS is continuing to
develop and enhance its methodology and documentation surrounding its
estimated cash flows. We will review TARP’s estimated cash flows and
resulting program costs as part of our ongoing work.

Treasury Has Received
Approximately $6.2 Billion
in Dividend Payments

From TARP’s inception through June 12, 2009, Treasury had received
approximately $6.2 billion in dividend payments on shares of preferred
stock acquired through CPP, TIP, AIFP, and AGP (table 2). Treasury’s
agreements under these programs entitled it to receive dividend payments
on varying terms and at varying rates. 15 The dividend payments to Treasury
are contingent on each institution declaring dividends.

14

This reporting is based on the Federal Credit Reform Act of 1990 and Section 123 of the
act, which states that the discount rate used to determine the present value of cash flows
be adjusted for market risk.

15

For example, according to the CPP terms for publicly held institutions, participating
institutions pay quarterly dividends at a rate of 5 percent per year for the first 5 years on
the initial preferred shares acquired by Treasury. After the first 5 years, the preferred
shares pay quarterly dividends at a rate of 9 percent per year. Any preferred shares
acquired through Treasury’s exercise of warrants pay quarterly dividends at a rate of 9
percent per year.

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Table 2: TARP Dividend Payments Received as of June 12, 2009
Dollars in thousands
Dividend
payments
received

Cumulative
dividends not
declared and
not paid

Noncumulative
dividends not
declared and not
paid

$4,822,420

$5,962

$802

Targeted Investment Program

1,128,889

-

-

Automotive Industry Financing
Programa

159,611

-

-

Asset Guarantee Program

107,573

-

-

-

-

-c

$6,218,493

$5,962

$802

Program
Capital Purchase Program

Systemically Significant Failing
Institutions Programb
Total
Source: Treasury OFS, unaudited.
a

GMAC LLC is the only institution participating in AIFP that issued preferred shares to Treasury and is
scheduled to pay dividends per the terms of the security purchase agreement through June 12, 2009.
The other AIFP participants issued debt instruments to Treasury that are not reflected on this table.

b

AIG is the sole participant in the Systemically Significant Failing Institutions program. On April 17,
2009, AIG and Treasury restructured their November 25, 2008, agreement. Under the restructuring,
Treasury exchanged $40 billion of cumulative Series D preferred shares for $41.6 billion of
noncumulative Series E preferred shares. The amount of Series E preferred shares is equal to the
original $40 billion, plus approximately $733 million in undeclared dividends as of February 1, 2009—
the scheduled quarterly dividend payment date—$15 million in dividends compounded on the
undeclared dividends, and an additional $855 million in dividends accrued from February 1, 2009, but
not paid as of April 17, 2009.
c

AIG’s restructured agreement kept the quarterly dividend payment dates of every May 1, August 1,
November 1, and February 1, established by the original November 25, 2008, agreement. However,
the restructured agreement also specified that dividends were payable beginning with the first
dividend payment date to occur at least 20 calendar days after the restructuring date. Accordingly, in
compliance with these dividend payment terms, the dividend payment for the period from April 17,
2009, through May 1, 2009, which amounts to approximately $150.2 million, is to be included in the
August 1, 2009, scheduled quarterly dividend payment.

From March 21, 2009, through June 12, 2009, 17 CPP participants had not
declared or paid dividends of approximately $6.6 million. Specifically, 7
institutions did not declare and pay their cumulative dividends of
approximately $6 million and 10 institutions did not declare and pay their

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GAO-09-658 Troubled Asset Relief Program

noncumulative dividends of approximately $666,000. 16 OFS said it received
notification from the 17 institutions that they did not intend to declare or
pay their May 15, 2009, quarterly dividends. According to OFS officials, of
the 17 institutions, 13 informed Treasury that state or federal banking
regulations or policies restricted them from declaring dividends, 1
indicated concern about its profitability, and 3 did not provide an
explanation as to why they did not declare dividends. According to the
standard terms of CPP, after six nonpayments by a CPP institution—
whether or not consecutive—Treasury and other holders of preferred
securities equivalent to Treasury’s can exercise their right to appoint two
members to the board of directors for that institution at the institution’s
first annual meeting of stockholders subsequent to the sixth nonpayment.
Five of these participants were also among the original eight participants
that did not declare or pay approximately $150,000 in noncumulative
dividends as reported in our March 2009 report. Two of the eight paid their
most recent dividend payments for the May 15, 2009, quarterly dividend
payment date. The other participant subsequently declared and paid the
approximately $14,000 in noncumulative dividends previously not paid and
its most recent May 15, 2009, quarterly dividend.

Treasury Continues to
Deploy Funds through CPP
While Some Participants
Repay Investments

Treasury has continued to use CPP as a primary vehicle under TARP as it
attempts to stabilize financial markets. As of June 12, 2009, Treasury had
disbursed about 92 percent of the $218 billion (revised from the original
$250 billion) it had allocated for the purchase of almost $199.5 billion in
preferred shares and subordinated debt from 623 qualified financial
institutions (table 3). 17 These purchases ranged from about $301,000 to
$25 billion per institution. As of June 12, 2009, about $712 million in
preferred stock shares and subordinated debt from 91 financial
institutions had been purchased since our March 2009 report.

16

If an institution does not declare a dividend for noncumulative preferred stock during the
dividend period, the noncumulative preferred shareholders generally have no right to
receive any dividend for the period, and the institution has no obligation to pay a dividend
for the period, whether or not dividends are declared for any subsequent dividend period.
Generally, if an institution does not declare a dividend for cumulative preferred stock
during the dividend period the unpaid dividends accumulate and the institution must pay
the cumulative accrued dividends before making dividend payments to other classes of
shareholders.

17

For purposes of CPP, financial institutions generally include qualifying U.S.-controlled
banks, savings associations, and both bank and savings and loan holding companies.

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GAO-09-658 Troubled Asset Relief Program

Table 3: Capital Investments Made through the Capital Purchase Program as of June 12, 2009
Closing date of
transaction

Amount of CPP capital
investment

Cumulative percentage of
allocated funds used for CPP
capital investment

Number of qualified financial
institutions receiving CPP
capital

10/28/2008

$115,000,000,000

52.75

8

11/14/2008

33,561,409,000

68.15

21

11/21/2008

2,909,754,000

69.48

23

12/5/2008

3,835,635,000

71.24

35

12/12/2008

2,450,054,000

72.37

28

12/19/2008

2,791,950,000

73.65

49

12/23/2008

1,911,751,000

74.52

43

12/31/2008

15,078,947,000

81.44

7

1/9/2009

14,771,598,000

88.22

43

1/16/2009

1,479,938,000

88.89

39

1/23/2009

385,965,000

89.07

23

1/30/2009

1,151,218,000

89.60

42

2/6/2009

238,555,000

89.71

28

2/13/2009

429,069,000

89.91

29

2/20/2009

365,397,000

90.07

23

2/27/2009

394,906,000

90.26

28

3/6/2009

284,675,000

90.39

22

3/13/2009

1,455,160,000

91.05

19

3/20/2009

80,748,000

91.09

10

3/27/2009

192,958,000

91.18

14

4/3/2009

54,826,000

91.20

10

4/10/2009

22,790,000

91.21

5

4/17/2009

40,945,000

91.23

6

4/24/2009

121,846,000

91.29

12

5/1/2009

45,532,000

91.31

7

5/8/2009

42,019,000

91.33

7

5/15/2009

107,623,000

91.38

14

5/22/2009

108,333,000

91.43

12

5/29/2009

89,207,000

91.47

8

6/5/2009

40,269,000

91.49

3

6/12/2009
Total

39,108,000

91.51

7

$199,482,185,000

91.51%

623a

Sources: Treasury and GAO.

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GAO-09-658 Troubled Asset Relief Program

Note: Treasury adjusted its allocation to CPP from $250 billion to $218 billion in March 2009.
According to Treasury officials, this downward adjustment reflects the estimated funding needs of the
program based on participation to date and the money it expects to receive from participants that
repay their CPP capital investment. The cumulative percentage of allocated fund numbers are now a
percentage of the $218 billion.
a

The total number of financial institutions was reduced by two because SunTrust Banks, Inc.
(SunTrust) and Bank of America Corporation (Bank of America) each received two capital investment
under CPP. SunTrust received a partial capital investment of $3.5 billion on November 12, 2008, and
another of $1.35 billion on December 31, 2008, Bank of America received $15 billion on October 28,
2008, and, after merging with Merrill Lynch & Co., Inc., an additional $10 billion on January 9, 2009.

As of June 12, 2009, a variety of types of institutions had received CPP
capital investments under TARP, including 278 publicly held institutions,
307 privately held institutions, 22 S-corporations, 16 community
development financial institutions (CDFI), and no mutual institutions. 18
These purchases represented investments in state-chartered and national
banks and U.S. bank holding companies located in 48 states, the District of
Columbia, and Puerto Rico. For a detailed listing of financial institutions
that received CPP funds as of May 29, 2009, see GAO-09-707SP. 19
Treasury and the federal regulators continued to review applications for
CPP. According to Treasury, it has received over 1,300 CPP applications
from the regulators as of June 12, 2009, fewer than 100 were awaiting
decision by the Investment Committee. For many applications in this
category, Treasury is awaiting updated information from the regulators
before taking the application to the Investment Committee for a vote. The
bank regulators also reported that they were reviewing applications from
more than 220 institutions that had not yet been forwarded to Treasury.
Qualified financial institutions generally have 30 calendar days after
Treasury notifies them of preliminary approval for CPP funding to submit

18

An S-corporation makes a valid election to be taxed under subchapter S of chapter 1 of
the Internal Revenue Code and thus does not pay any income taxes. Instead, the
corporation’s income or losses are divided among and passed through to its shareholders.
A mutual organization is a company that is owned by its customers rather than by a
separate group of stockholders. Many thrifts and insurance companies (for example,
Boston Mutual and New York Life) are mutuals. A CDFI is a specialized financial institution
that works in market niches that are underserved by traditional financial institutions.
CDFIs provide a range of financial products and services, such as mortgage financing for
low-income and first-time homebuyers and not-for-profit developers; flexible underwriting
and risk capital for needed community facilities; and technical assistance, commercial
loans, and investments to small start-up or expanding businesses in low-income areas.
19

GAO, Troubled Asset Relief Program: Capital Purchase Program Transactions for the
Period October 28, 2008, through May 29, 2009, and Information on Financial Agency
Agreement, Contract, Blanket Purchase Agreements, and Interagency Agreements
Awarded as of June 1, 2009, GAO-09-707SP (Washington, D.C.: June 17, 2009).

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GAO-09-658 Troubled Asset Relief Program

investment agreements and related documentation. OFS officials stated
that about 400 financial institutions that received preliminary approval had
withdrawn their CPP applications as of June 12, 2009. Many of these
institutions withdrew their applications because of the uncertainty
surrounding future program requirements. 20
Some financial institutions have continued to raise concerns about the
length of time it is taking the bank regulators and Treasury to process their
CPP applications. Bank regulatory officials noted that many factors could
affect the time it took to process a particular bank’s CPP application. For
example,
•

the necessary term sheet for a particular ownership structure might not
have been available when the bank filed its application and the application
could not be processed, 21

•

the bank regulators’ interagency CPP Council needed to review the
application,

•

regulators needed to perform on-site visitations or conduct new bank
examinations if the existing examination was dated,

•

regulators needed to consider enforcement actions, or

•

regulators had to request additional information (e.g., related to credit
quality) from the bank before processing its application.
Data provided by the bank regulators showed that, as of May 15, 2009, the
average processing time for CPP applications—from the date the regulator
received the institution’s application to the date it was forwarded to
Treasury—varied from 28 days to 57 days depending on the regulator

20

We are continuing to examine the process for accepting and approving CPP applications.
Specifically, we have begun reviewing CPP applications that had been funded from October
2008 through January 2009 to determine the extent to which the regulators and OFS were
consistently applying established criteria and adequately documenting the regulators’
recommendations and OFS’s final decisions. We also plan to review subsequent
applications, and in conjunction with SIGTARP, to evaluate the process across the banking
regulators. We will report on this work separately.

21

Treasury issued the term sheet for publicly held institutions on October 20, 2008; for
privately held institutions on November 17, 2008; for S-corporations on January 14, 2009;
and for mutual institutions on April 7 and 14, 2009.

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GAO-09-658 Troubled Asset Relief Program

(table 4). 22 OFS officials noted that some of the reasons for delays in the
final processing of CPP applications once they had been received, were
the need to obtain shareholder approval to issue preferred stock to
Treasury, obtain executive compensation certification waivers, or
schedule board of directors meetings. According to data provided by OFS,
as of May 15, 2009, the average processing time from the receipt of CPP
application package from the regulators to preliminary funding approval
was about 12 days, and from preliminary funding approval to
disbursement of funds was about 34 days. We are verifying this
information as part of our ongoing review of the CPP process.
Table 4: Average Processing Days Reported by the Federal Reserve, OTS, OCC and
Treasury of CPP Applications, as of May 15, 2009

Bank regulator

Average processing
Average processing
days from bank
days from Treasury
regulator CPP
CPP application
application receipt receipt date from bank
date to submission regulators to Treasury
to Treasury disbursement of funds

Average total
processing
timea

Federal Reserve

28

42

70

Office of Thrift
Supervision

45

37

82

Office of the
Comptroller of the
Currency

57

40

97

Sources: Federal Reserve, OCC, OTS, and OFS.

Notes: FDIC is not included because according to officials, it did not track such information and was
unable to provide such data. These numbers are based on applications that were processed by the
banking agencies and submitted to Treasury, regardless of whether the application was ultimately
funded or withdrawn. Applications that were withdrawn prior to a recommendation being submitted to
Treasury and applications still in process were not included in the averages.
Because these are averages and to the extent that the regulators and Treasury continue to approve
applications that have been in the pipeline, the averages are likely to increase over time.
a

Average total processing time is the sum of the prior two columns.

22
According to FDIC, it does not keep track of processing times for individual applications
and thus was unable to provide us with the average processing time for the more than 1,700
CPP applications it has received.

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Treasury Extended the
Deadline for Small Banks
to Apply for CPP Funding
and Increased the Funding
Limit

The Treasury Secretary announced in a May 13, 2009, speech that Treasury
had taken additional actions under CPP to ensure that small community
banks and holding companies (qualifying financial institutions with total
assets less than $500 million) would have the capital they needed to lend
to creditworthy borrowers. Small banks now have until November 21,
2009, to apply to CPP under all term sheets. All current CPP participants
that qualify as a small bank under these new program terms will be
allowed to reapply and note on their applications that they are making a
supplemental request for CPP funding. These applications will be
evaluated via an expedited approval process that Treasury is currently
working with the four primary federal banking regulators to establish. 23
New CPP participants will continue to have their applications processed
under the original CPP applications process. Treasury also increased the
maximum amount of CPP funding a small financial institution may receive
from the current 3 percent of risk-weighted assets to 5 percent of riskweighted assets. 24 The new deadline for small banks to apply to their
regulator to form holding companies and apply for CPP funding is also
November 21, 2009.

Treasury Finalized CPP
Standard Term Sheets for
Mutual Institutions

On April 7, and 14, 2009, Treasury issued standardized term sheets for four
types of mutual institutions: mutual holding companies with publicly held
subsidiary holding companies, mutual holding companies with privately
held subsidiary holding companies, top-tier mutual holding companies
without subsidiary holding companies, and mutual banks or savings
associations not controlled by holding companies. The terms for the four
types of mutual institutions are generally similar to those for the
corresponding publicly held institutions, privately held institutions and
S-corporations, with some exceptions. The application deadline for mutual
holding companies was May 7, 2009; for mutual banks or savings
associations not controlled by holding companies the deadline was May
14, 2009.

23

This applies to all types of CPP participants: publicly held institutions, privately held
institutions, S-corporations, and mutual institutions. The application deadlines for each of
these types of CPP participants have passed.

24

Risk-weighted asset are the total assets and off-balance sheet items held by an institution
that are weighted for risk according to regulation by the Federal Reserve.

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GAO-09-658 Troubled Asset Relief Program

Like the terms for publicly held institutions, those for publicly held mutual
subsidiary holding companies stipulate that
•

the preferred shares pay dividends at a rate of 5 percent annually for the
first 5 years and 9 percent annually thereafter;

•

the shares are nonvoting, except with respect to protecting investors’
rights;

•

a warrant must be issued for common stock with an aggregate value equal
to 15 percent of the Treasury’s CPP investment;

•

financial institutions may repurchase their shares at their face value;

•

preferred stock will count as tier 1 regulatory capital; 25 and

•

Treasury generally may transfer the preferred shares to a third party at any
time.
In addition, the number of shares of common stock underlying the warrant
held by Treasury will be reduced by 50 percent if the institution completes
a qualified equity offering for 100 percent of the amount of the preferred
stock during 2009. 26
The terms for privately held subsidiary holding companies are generally
similar, except for the warrant for preferred stock. For these companies,
as for privately-held institutions, warrants for preferred stock may have an
aggregate value equal to 5 percent of the Treasury’s CPP investment.
Treasury intends to immediately exercise such warrants for warrant
preferred shares with a 9 percent dividend rate.
The terms for top-tier mutual holding companies without subsidiary
holding companies and mutual banks or savings associations without
holding companies are similar to those for S-corporations. Those terms are
generally similar to those for publicly held institutions, with the exception
that debt—senior notes—is issued instead of preferred stock. In addition,

25

Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of
view. It is considered the most stable and readily available capital for supporting a bank’s
operations.

26

A qualified equity offering is the sale and issuance of Tier 1 qualifying perpetual preferred
stock, common stock, or a combination of such stock for cash.

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GAO-09-658 Troubled Asset Relief Program

the senior notes count as tier 1 capital when held at the holding company
level and tier 2 capital when held by a mutual bank or savings association.
The senior notes pay interest at a rate of 7.7 percent annually for 5 years
and 13.8 percent thereafter, and warrants for additional debt must equal 5
percent of the Treasury’s initial investment. 27 Treasury exercises the
warrants at the time of the initial capital investment. Holding companies
may defer interest on the senior notes for up to 20 quarters, but any unpaid
interest will accumulate and compound at the then-applicable interest rate
in effect. In addition, these companies cannot pay dividends on shares of
equity, mutual capital certificates, other capital instruments, or trust
preferred securities as long as any interest is deferred. Treasury has
indicated that, while the term sheets for privately held mutual institutions
allow institutions to reduce the warrants held by Treasury if they complete
a qualified equity offering during 2009, this provision was included in the
term sheets in error. In each case, Treasury intends to exercise the
warrants immediately and there is no need for the reduction provision.

Financial Institutions Have
Begun to Repurchase Their
CPP Preferred Stock and
Warrants from Treasury
but the Process Lacks
Adequate Transparency

As permitted by the act—as amended by American Recovery and
Reinvestment Act of 2009 (ARRA)—and the CPP agreements, participants
may repurchase or buy back their preferred stock and warrants issued to
Treasury under CPP at any time, subject to consultation with the primary
federal banking regulator. 28 However, the regulators have yet to disclose to
Treasury or the public a generally consistent set of criteria that they are
using to make decisions concerning repayment other than that they follow
existing applicable supervisory procedures. According to Treasury
officials, ARRA severely limits Treasury’s authority to decide whether
banks may purchase their stock. 29 After all the preferred shares are

27

According to the term sheets, the higher rates of 7.7 percent and 13.8 percent will equate
to after-tax effective rates (assuming a 35 percent tax rate) of 5 percent and 9 percent,
respectively—the same rates applied to securities issued by other classes of institutions
participating in CPP.

28

Pub. L. No. 111-5, 123 Stat. 115 (2009). Section 7001 provides, in part, that “Subject to
consultation with the appropriate Federal banking agency, if any,….Treasury shall permit a
TARP recipient to repay any assistance previously provided under the TARP to such
financial institution, without regard to whether the financial institution has replaced the
funds from any other source or to any waiting period.” (Emphasis added.) ARRA also
required that Treasury liquidate the warrants when the assistance was repaid. This
requirement was amended by the Helping Families Save Their Homes Act of 2009, Pub. L.
No. 111-22, which removed the requirement that Treasury liquidate the warrants when the
assistance is repaid.

29

Treasury cites ARRA section 7001, which, as noted above, states that Treasury “shall”
permit repayment.

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repurchased, the financial institution may repurchase all or part of the
warrants held by Treasury. Under the original terms of CPP, financial
institutions were prohibited from repurchasing within the first 3 years
unless they completed a qualified equity offering. 30 ARRA amended this
requirement by allowing institutions to repurchase their shares with the
approval of their primary federal regulator. See appendix IV for a
description of the repurchase process.
While Treasury has some information about the preferred stock
repurchase process on the www.financialstability.gov Web site, the federal
financial regulators have yet to disclose the specific criteria for approving
repurchases for certain TARP recipients. 31 In order to help ensure
consistency, agencies are expected to develop adequate internal controls
to ensure consistent decision making. 32 Unless the Treasury, in
consultation with the primary federal regulators, take steps to ensure that
the regulators have and apply generally consistent criteria and clearly
articulate the basis they have used or plan to use to approve or deny
repurchase requests, Treasury will face an increased risk that TARP
participants may not be treated equitably.
As of June 12, 2009, 22 institutions had repurchased their preferred stock
from Treasury for a total of about $1.9 billion (see table 5 for additional
repurchase information). Also, as of June 12, 2009, 5 financial institutions
had repurchased their warrants and 3 institutions had repurchased
warrant preferred stock from Treasury at an aggregate cost of about

30

Our use of the term repurchases in this report is general and does not differentiate
between repurchases and redemptions of senior preferred stock. A redemption of senior
preferred stock occurs when an institution completes a qualified equity offering per the
standard terms of the preferred stock and subsequently exchanges cash for its senior
preferred stock previously issued to Treasury. A repurchase occurs when the institution
buys back its senior preferred shares without having completed a qualified equity offering,
as permitted by ARRA or an other authority.

31

The Federal Reserve has provided such criteria for the 19 bank holding companies that
were subject to the stress test. We discuss these criteria later in the report.

32

See GAO, Standards for Internal Control in the Federal Government, AIMD-00-21.3.1
(Washington, D.C.: Nov. 1, 1999).

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$13.3 million. 33 In addition, 3 financial institutions had informed Treasury
that they did not plan to repurchase their warrants. For those institutions
that informed Treasury that they did not intend to repurchase their
warrants, Treasury may attempt to sell the warrants in the financial
markets. According to a Treasury official, as of June 12, 2009, Treasury has
not yet liquidated any CPP warrants in the financial markets. 34
Table 5: Capital Purchase Program Repurchases, as of June 12, 2009
Dollars in thousands

Institution Type
Private Institutions
Public Institutions
Total

Repurchase amount
for preferred stock
initially issued to
Treasury

Repurchase amount
for preferred stock
issued through
exercise of warrants

Repurchase Dividend payments
amount for received at the time
warrants
of repurchasea

Total cash
received

$31,900

$1,595

N/A

$179

$33,674

1,839,960

N/A

11,725

11,920

1,863,605

$1,871,860

$1,595

$11,725

$12,099

$1,897,279

Source: Treasury OFS, unaudited.
a

Dividend payments received at the time of repurchase are also included in CPP dividend payments
received in Table 2 of this report.

On June 9, 2009, Treasury announced that 10 of the largest U.S. financial
institutions participating in CPP had met the requirements for repayment
established by their primary federal regulator and that, following
consultation with the regulators, Treasury had notified the institutions that
they were eligible to complete the repurchase process. Collectively, the
Treasury-held preferred shares in these 10 institutions have a liquidation
preference of approximately $68 billion. Upon completion of the preferred

33

The five institutions are publicly held. Privately held institutions do not have warrants to
repurchase from Treasury. Treasury received from the privately held institutions warrants
to purchase a specified number of shares of preferred stock, called warrant preferred
stock, that pay dividends at 9 percent annually. The exercise price for the warrant
preferred stock is $0.01 per share unless the financial institution’s charter requires
otherwise. Unlike for publicly held institutions, Treasury exercised these warrants
immediately for warrant preferred stock.

34

CPP preferred stock repayments by financial institutions are deposited to the General
Fund of the U.S. Treasury that is used to repay the debt that was issued to fund Treasury’s
original purchase. The proceeds received from the repurchases reduce the outstanding
balance under the almost $700 billion TARP limit. Treasury then may issue new debt to
purchase new financial instruments if it so chooses. However, CPP dividends and interest
paid by recipients back to TARP and the proceeds from liquidation from warrants and any
common or preferred stock Treasury obtains through the exercise of warrants are
deposited into the General Fund of the Treasury and are not to be used to reduce the
outstanding balance under the almost $700 billion TARP limit.

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GAO-09-658 Troubled Asset Relief Program

stock repurchase process, each institution will have the right to
repurchase the warrants held by Treasury.
As mentioned previously, as of June 12, 2009, 5 institutions had
repurchased their warrants from Treasury. We found that Treasury
followed a consistent process in these instances; however, according to
Treasury, there is no readily available market for the warrants that had
been repurchased to date. The value of those warrants depends on the
valuation process and the underlying assumptions. In one instance,
Treasury received multiple offers from the institution to repurchase its
warrants but rejected the first two offers. The final offer that Treasury
accepted was slightly lower than Treasury’s own determination of the
market value of the institution’s warrants but more than twice the initial
offer and slightly more than its second. According to documents we
reviewed, in accordance with its process for determining whether to
accept an offer from the institution, Treasury considered 1) warrant price
indications from certain market participants, 2) certain warrant pricing
models, 3) a warrant price calculation from a third-party contractor, and 4)
Treasury’s own financial analysis of the institution. According to Treasury,
the final warrant price was deemed to be reasonable given that the
institution’s stock price had declined during negotiations, reducing the
warrant’s value and that Treasury’s market value determination for the
warrant was based on a number of factors that involve judgment such as
liquidity discounts. If Treasury and the issuing institutions cannot agree on
a price, either can invoke an appraisal procedure whereby each chooses
an independent appraiser to determine the estimated fair market value
(FMV) and if the two cannot agree on a FMV, they will appoint a third
appraiser. 35 If an institution decides not to repurchase its warrants under
the negotiation and appraisal procedure, Treasury may sell the warrants

35

Under the appraisal procedure, the three valuations are to be averaged unless the larger
of the differences between the higher and middle valuations and the middle and lower
valuations is more than 200 percent of the smaller of the differences. If the larger
difference exceeds 200 percent of the smaller of the differences, the outlying valuation that
triggers the exception is to be excluded and the FMV is to be determined by the average of
the remaining two. For example, if the FMVs are $75 million, $50 million, and $40 million,
the $75 million FMV would be excluded because the difference between $75 million and
$50 million ($25 million) is more than 200 percent of the difference between $50 million
and $40 million ($10 million).

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through an auction process—another mechanism that Treasury could use
to sell shares—when it deems appropriate. 36
Treasury describes the warrant repurchase process broadly on the
www.financialstability.gov Web site. Additional details about the process
are contained in the individual securities purchase agreements that are
also posted on the Web site. Further, the final warrant prices are disclosed
on the Web site. However, Treasury has provided limited information
about the valuation process it has used to date. Specifically, it has not
disclosed the details—such as the institution’s initial offer or how the final
price compares to Treasury’s valuation. For less liquid securities, prices
can vary widely depending on the assumptions underlying the valuation
models leading some market observers to question whether Treasury had
received a fair market value for the warrants that have been repurchased
to date. By not being more transparent about the valuation process and the
negotiations that were undertaken to establish the accepted warrant price,
Treasury increases the likelihood that questions will remain about whether
Treasury has best served taxpayers’ interests. Given the broad ranging
risks inherent in TARP, Treasury must take steps to help ensure that its
decisions are not only fair and equitable but also that they result in
maximum value. Unless Treasury takes this type of broad-based approach,
it may not ensure that taxpayers’ interests are fully protected. 37
In our March 2009 report, we recommended that Treasury update
guidance available to the public on determining warrant exercise prices to
be consistent with actual practices applied by OFS. Treasury has since
updated its frequently asked questions on its Web site to clarify the
process it follows for determining the prices. However, there continues to
be inconsistent guidance available on the Web site for calculating the
exercise prices. Treasury told us that because any new CPP applicants
would most likely be nonpublic institutions, the existing guidance
documents would not apply. Therefore, Treasury does not believe the

36

Once Treasury rejects the initial offer from an institution to repurchase its warrant, the
institution and Treasury have 10 days to negotiate a purchase price. If they are unable to
agree on a price, either party has 30 days from the day Treasury rejected the offer to invoke
the appraisal procedure specified in the Securities Purchase Agreement. If Treasury rejects
an offer from an institution and neither party invokes the appraisal procedure, Treasury
may sell the warrant to a third party through any means, including an auction.

37

The Special Inspector General for TARP is planning to explore additional issues involving
the warrant valuation process.

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inconsistent guidance is a significant issue and therefore does not plan on
further addressing the inconsistency.

OFS Continues to Collect
Information on
Participants’ Lending
Activity and Recently
Hired Asset Managers to
Help Ensure Compliance
with Securities Purchase
Agreements

OFS continues to take important steps toward better reporting on and
monitoring of CPP. These steps are consistent with our prior
recommendations that Treasury bolster its ability to determine whether all
institutions’ activities are generally consistent with the act’s purposes. On
May 15, 2009, Treasury published the fourth monthly bank lending and
intermediation snapshot and survey. 38 In April 2009, Treasury started
collecting basic information from the 21 largest CPP recipients on their
lending to small businesses in the monthly lending surveys. According to
Treasury, these data will be published in June 2009. These monthly
surveys are a step toward greater transparency and accountability for
institutions of all sizes. Survey results will allow Treasury’s newly created
team of analysts to understand the lending practices of CPP participants
and will help in measuring the program’s effectiveness in achieving its goal
of stabilizing the financial system by enabling the institutions to continue
lending during the financial crisis. We will continue to monitor Treasury’s
oversight efforts, including implementation of its new survey of all other
CPP recipients.
In addition, on June 1, 2009, Treasury published the results of its first
monthly survey of lending at all CPP institutions. These data include loans
outstanding to consumers, commercial entities and total loans
outstanding. This survey will continue on a monthly basis going forward.
The survey and the results can be found at www.financialstability.gov.
Also, and consistent with our prior recommendations, Treasury has
continued to take steps to increase its oversight of compliance with terms
of the CPP agreements, including limitations on executive compensation,
dividends, and stock repurchases. Participating institutions are required to
comply with the terms of these agreements, and we recommended that
Treasury develop a process to monitor and enforce them. According to
Treasury, it relied on its custodian bank—Bank of New York Mellon—to
collect relevant information from a variety of informal sources, such as
Securities and Exchange Commission filings and press releases and
information provided by CPP participants. According to Treasury, if OFS

38

See Treasury, Treasury Department Monthly Lending and Intermediation Snapshot
Summary Analysis for March 2009, http://www.treas.gov/press/releases/tg30.htm.

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GAO-09-658 Troubled Asset Relief Program

becomes aware of any instances of noncompliance with requirements,
they are to refer the instances to its Chief Risk and Compliance Office,
which would work with the CPP office, to determine if further action is
needed. On April 22, 2009, Treasury hired three asset management firms
that will play a role in this process. 39 According to Treasury officials, the
asset managers’ primary role will be to provide Treasury with market
advice about its portfolio of investments in financial institutions and
corporations participating in various TARP programs. The managers will
also help OFS monitor compliance with limitations on compensation,
dividend payments, and stock repurchases. 40 Treasury said that it is also
exploring software solutions and other data resources to improve
compliance monitoring. We plan to continue monitoring this area.
As we have noted previously, without a more structured mechanism in
place, and with a growing number of institutions participating in TARP,
ensuring compliance with these important requirements will become
increasingly challenging. While the institutions are obligated to comply
with the terms of the agreement, Treasury has not yet developed a process
to help ensure compliance and to verify that any required certifications are
accurate.

Treasury Issued New
Interim Final Rules on
Executive Compensation

On June 10, 2009, Treasury adopted an interim final rule to implement the
executive compensation and corporate governance provisions of the act,
as amended by ARRA, as well as to adopt certain additional standards
deemed necessary by the Secretary to carry out the purposes of the act. 41
The interim final rule requires that recipients of TARP financial assistance
meet standards for executive compensation and corporate governance.
The requirements generally include

39

These three asset managers were selected from more than 200 submissions from firms
interested in the November 7, 2008, solicitation for asset managers. Treasury also selected
a consulting firm to provide management services relating to AIFP.

40

The portfolio of TARP investments generally includes senior preferred stock, senior
subordinated debt, equity warrants, and other equity and debt obligations.

41

TARP Standards for Compensation and Corporate Governance, 74.Fed. Reg. 28, 394
(June 15, 2009)(to be codified at 31 C.F.R. Part 30). Pursuant to section 101(c) of the act,
the Secretary is authorized to issue regulations and other guidance that the Secretary
deems necessary and appropriate to carry out the purposes of the act. The interim final
rule became effective on June 15, 2009, and will be open for public comment for an
additional 60 days.

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GAO-09-658 Troubled Asset Relief Program

•

limits on compensation that exclude incentives for senior executive
officers to take unnecessary and excessive risks that threaten the value of
TARP recipients; 42

•

provision for the recovery of any bonus, retention award, or incentive
compensation paid to a senior executive officer or the next 20 most highly
compensated employees based on materially inaccurate statements of
earnings, revenues, gains, or other criteria;

•

prohibition on making any golden parachute payment to a senior
executive officer or any of the next 5 most highly compensated employees;

•

prohibition on the payment or accrual of bonus, retention awards, or
incentive compensation to senior executive officers or certain highly
compensated employees, subject to certain exceptions for payments made
in the form of restricted stock; and

•

prohibition on employee compensation plans that would encourage
manipulation of earnings reported by TARP recipients to enhance
employees’ compensation.
The new rule also requires the (1) establishment of a compensation
committee of independent directors to meet semiannually to review
employee compensation plans and the risks posed by these plans to TARP
recipients; (2) adoption of an excessive or luxury expenditures policy;
(3) disclosure of perquisites offered to senior executive officers and
certain highly compensated employees; (4) disclosure related to
compensation consultant engagement; (5) prohibition on tax gross-ups
(payments to cover taxes due on compensation) to senior executive
officers and certain highly compensated employees; and (6) compliance
with federal securities rules and regulations regarding the submission of a
nonbinding resolution on senior executive officer compensation to
shareholders.
The new interim regulations also require the establishment of the Office of
the Special Master for TARP Executive Compensation (Special Master) to
address the application of the rules to TARP recipients and their
employees. Among the duties and responsibilities of the Special Master,

42

The senior executive officers are generally the principal executive officer, the principal
financial officer, and the three most highly compensated executive officers (other than the
principal executive officer and the principal financial officer).

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GAO-09-658 Troubled Asset Relief Program

with respect to TARP recipients of exceptional assistance, is to review and
approve compensation payments and compensation structures applicable
to the senior executive officers and certain highly compensated
employees, and to review and approve compensation structures applicable
to certain additional highly compensated employees. Companies receiving
exceptional assistance include those receiving assistance under the SSFI,
TIP, and AIFP and currently include AIG, Bank of America, Citigroup,
Chrysler, Chrysler Financial, GM, and GMAC. TARP recipients not
receiving exceptional assistance may apply to the Special Master for an
advisory opinion with respect to compensation payments and structures.
The Special Master will also have responsibility for administering the
review of bonuses, retention awards, and other compensation paid to
employees of TARP recipients before February 17, 2009, and the
negotiation of appropriate reimbursements to the federal government.
Finally, the interim final rule also establishes compliance reporting and
record-keeping requirements regarding the rule’s executive compensation
and corporate governance standards.

While No Funds Have
Been Disbursed under
CAP, the Regulators
Announced the Results of
the Stress Tests of the 19
Largest U.S. Bank Holding
Companies

While no funds had been disbursed under CAP as of June 12, 2009,
regulators have announced the results of stress tests that were a key
component of the program. Moreover, Treasury announced that
institutions interested in CAP funding are required to submit CAP
applications to their primary banking regulators by November 9, 2009.
According to Treasury, no CAP applications have been received. In a
process similar to the one used for CPP, the regulators are to submit
recommendations to Treasury regarding an applicant’s viability. A key
component of the program is the Supervisory Capital Assessment Program
(SCAP) or stress test of the 19 largest U.S. bank holding companies—those
with risk-weighted assets of at least $100 billion—that together account
for approximately two-thirds of the assets in the aggregate U.S banking
industry. The federal banking regulators designed the assessment as a
forward-looking exercise intended to help them gauge the extent of the
additional capital buffer necessary to keep the institutions strongly
capitalized and lending even if economic conditions are worse than had
been expected between December 2008 and December 2010. On Thursday
May 7, 2009, the Federal Reserve released the stress test results. Bank
regulators found that 10 of the institutions needed to raise additional
capital (via the private sector or CAP) to meet capital standards that
would allow them to continue lending to creditworthy borrowers and
absorb potential losses.
The stress tests involved two economic scenarios, one representing the
baseline expectation and the other a more adverse outlook involving a

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deeper and more protracted downturn. According to the Federal Reserve,
the more adverse outlook was not intended to be a worst-case scenario
but rather a deliberately stringent test designed to account for highly
uncertain financial and economic conditions by identifying the extent to
which a bank holding company is vulnerable today to a weaker than
expected economy in the future. The required capital buffer was sized
based on the more adverse scenario. While the forecast for the three
economic indicators—GDP growth, unemployment rates, and home price
changes—were considered quite severe at the time they were formulated
in February, subsequent data indicated that the probability of the more
adverse scenario was likely higher than previously thought, particularly
with respect to the unemployment rate. According to Federal Reserve
officials, house prices are at least as important as the unemployment rate
in determining estimated losses at banks over the next 2 years because
many of the estimated losses are related to real estate values. The
specified trend in house prices under the more adverse scenario still
represents a very severe outcome. These are areas that we plan to
continue to monitor.

Stress Tests Estimated Losses
for 2009 and 2010 of $600
Billion and Projected Capital
Requirements

Based on data as of December 31, 2008, the Federal Reserve estimated that
total losses for the 19 companies during the 2009 to 2010 period would be
approximately $600 billion, in addition to any losses prior to 2009 (table 6).
As a result, the total losses for the top 19 U.S. bank holding companies
since the beginning of the financial crisis in the second quarter of 2007
would be nearly $950 billion. The $600 billion represents a 7.7 percent loss
of total risk-weighted assets for the 19 companies.
Table 6: Estimated Losses for the 19 U.S. Bank Holding Companies in SCAP,
January 2009 through December 2010
Dollars in billions
Bank holding company
Bank of America Corporation
Citigroup, Inc.

Total losses
$136.6
104.7

JPMorgan Chase & Co.

97.4

Wells Fargo & Company

86.1

Morgan Stanley

19.7

PNC Financial Services Group, Inc.

18.8

The Goldman Sachs Group, Inc.

17.8

U.S. Bancorp

15.7

Capital One Financial Corporation

13.4

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Dollars in billions
Bank holding company

Total losses

SunTrust Banks, Inc.

11.8

American Express Company

11.2

MetLife, Inc.

9.6

GMAC LLC

9.2

Regions Financial Corporation

9.2

FifthThird Bancorp

9.1

BB&T Corporation

8.7

State Street Corporation

8.2

KeyCorp

6.7

The Bank of New York Mellon Corporation
Total

5.4
$599.2

Source: Federal Reserve Board.

The U.S. bank holding companies were asked to list available resources
that they could use to absorb losses without impacting capital. Primary
among these was the allowance for loan and lease losses as of year end of
2008 and preprovision net revenue, or the expected recurring income from
ongoing business lines before any credit costs. The SCAP buffer for each
bank holding company is defined as the incremental capital that must be
provided to ensure that the bank would be able to meet two capital ratio
tests at December 31, 2010, assuming losses under the more adverse
scenario. First, tier 1 common capital to risk-weighted assets must be at
least 4 percent, and second, tier 1 capital to risk-weighted assets must be
at least 6 percent at December 31, 2010. While some market observers
have been critical of the process by which regulators shared preliminary
results with the bank holding companies and made subsequent
adjustments based on feedback from the bank holding companies, Federal
Reserve officials noted that such discussions are a normal part of the
examination process. Further, Federal Reserve officials explained that the
adjustments to the capital shortfall or “SCAP Buffer” largely reflected
addressing data errors, double counts, and other technical issues, rather
than to present any substantive arguments made by the U.S. bank holding
companies. We will be evaluating this process and will report on our
results in a future report.
While the data used was as of December 31, 2008, some banks reported
significant earnings and capital increases in the first quarter of 2009 from
asset sales, announced common equity issuances, and in one case the
announced, but not yet completed, conversion of preferred shares to

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common shares. The regulators incorporated these changes into their
analysis. The results showed that 10 of the 19 institutions needed to raise a
total of almost $75 billion in equity capital (table 7). As required, the
institutions submitted capital plans to the Federal Reserve on June 8, 2009,
on how they plan to raise the needed capital and will have a total of 6
months in which to raise the capital from private markets (common equity
offerings, assets sales, and the conversion of other forms of capital into
common equity) or additional government assistance through CAP. As of
June 12, 2009, eight of the 19 U.S. bank holding companies have
announced or raised a total of $59.2 billion toward the required $75 billion.
Table 7: Capital Raising Requirements SCAP Bank Holding Companies, as of June 12, 2009
Dollars in billions

U.S. Bank
holding
companies
Bank of America
Corporation
Wells Fargo &
Company
GMAC LLC
Citigroup, Inc.

SCAP buffer
required under
more adverse
scenario

Capital action
taken as of stress Required new
test and first
common
quarter profit
equity under
(loss)
SCAP

$46.5

New capital
Capital actions
raised as of announced as of
June 12, 2009
June 12, 2009

Required
capital yet to
be raised

$12.7

$33.9

$32.9

-

$1.0

17.3

3.6

13.7

8.6

-

5.1

6.7

(4.8)

11.5

3.5

-

8.0

92.6

87.1

5.5

-

5.5

-

Regions Financial
Corporation

2.9

0.4

2.5

1.9

-

0.7

SunTrust Banks,
Inc.

3.4

1.3

2.2

2.1

-

0.1

KeyCorp

2.5

0.6

1.8

1.3

-

0.5

Morgan Stanley

8.3

6.5

1.8

10.2

-

-

FifthThird Bancorp

2.6

1.5

1.1

1.0

1.1

-

PNC Financial
Services Group,
Inc.
Total

2.3

1.7

0.6

0.6

-

-

$185.0

$110.6

$74.6

$62.0

$6.6

$15.4

Source: Federal Reserve Board and company press releases.
a

While GMAC has sold $7.5 billion in mandatorily converted preferred membership interests to
Treasury, this amount was bifurcated with $3.5 billion being applied to the SCAP buffer requirement
and the remaining $4 billion reserved for GMAC's agreement with Chrysler LLC to finance dealers
and auto sales.
Note: Not all numbers total due to rounding.

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GAO-09-658 Troubled Asset Relief Program

Treasury and the Federal
Reserve Released Stress Tests
Results but Do Not Plan
Further Disclosures

Both Treasury and Federal Reserve officials emphasized the
unprecedented nature of the detailed bank-level disclosure of both losses
and revenue forecasts in the stress tests. However, Federal Reserve
officials told us that they had no plans to provide periodic updates of
actual performance of the U.S. bank holding companies in the stress tests
relative to loss or revenue estimates under the more adverse scenario.
Federal Reserve officials said they view this information as part of the
supervisory process. While the Federal Reserve shared preliminary results
of the stress test with senior Treasury officials, it neither shared the
results of the stress tests with CPP officials prior to the public release nor
does it plan to provide any additional routine information going forward.
However, federal Reserve officials said that supervisory information can
be provided to Treasury on a confidential basis when Treasury has a
significant program need for the information. Moreover, whether and to
what extent the bank holding companies will disclose additional
information is unclear. These decisions raise a number of potential
concerns. First, to the extent that information is disclosed by the
institutions, it may be disclosed selectively and may not be consistent
across institutions and could lead to increased market uncertainty.
Second, because the stress tests were conducted as part of CAP, not
making the results available to OFS officials for ongoing participants could
adversely impact Treasury’s ability to monitor the program. Finally, such
information would be useful in the measurement of the effectiveness of
SCAP and CAP. Without it, the public will not have reliable information
that can be used to gauge the accuracy of the stress test projections on a
more detailed basis than what has been disclosed in the SCAP papers. 43

The Federal Reserve
Announced Criteria for Large
Banks to Repay Capital
Investments

With respect to the 19 U.S. bank holding companies that participated in
SCAP, on June 1, 2009, the Federal Reserve released the criteria it plans to
use to evaluate applications to repurchase Treasury’s capital investments.
The items published are similar to those already in use to evaluate

43

See Board of Governors of the Federal Reserve System, “The Supervisory Capital
Assessment Program: Design and Implementation,” April 24, 2009, and “The Supervisory
Capital Assessment Program: Overview of Results,” May 7, 2009.

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GAO-09-658 Troubled Asset Relief Program

repurchase requests that had been received from smaller bank holding
companies, 44 and include the following considerations
•

the bank holding company’s ability to continue to act as an intermediary
and spur lending to creditworthy households and businesses,

•

whether the bank holding company’s post-repurchase capital position is
consistent with the Federal Reserve’s supervisory expectations,

•

whether the bank holding company will maintain its financial and
management support for its subsidiary banks subsequent to repurchase,
and

•

whether the bank holding company and subsidiaries are in a position to
meet all of their funding and counterparty obligations without government
capital or utilization of the FDIC’s Temporary Liquidity Guarantee
Program.
Finally, the Federal Reserve stated that the U.S. bank holding companies
that participated in the SCAP process seeking to repurchase CPP would be
subject to the following additional criteria:

•

A demonstrated ability to raise long-term debt without any FDIC guarantee
or equity in the public equity market.

•

Progress towards a robust longer-term capital assessment and
management process geared toward achieving and maintaining a prudent
level and composition of capital commensurate with their business
activities and firm-wide risk profile.
The Federal Reserve in consultation with the U.S. banking holding
companies’ primary bank regulator and FDIC informed Treasury on June
9, 2009, that it had no objection to the repurchase of preferred shares by 9
of the SCAP bank holding companies. Also on June 9, 2009, Treasury
announced that these 9 U.S. bank holding companies, and one other large

44

For U.S. bank holding companies other than the SCAP 19, the Federal Reserve’s criteria
include consideration of the ability of the company to maintain appropriate capital levels,
even assuming worsening economic conditions; whether the holding company will be able
to serve as a source of financial and managerial strength to subsidiary banks; and the level
of capital and composition of capital, earnings, asset quality, and liquidity, among other
factors.

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GAO-09-658 Troubled Asset Relief Program

institution, met the requirements for repayment and would be eligible to
repay $68 billion to Treasury.

The Federal Reserve
Announced Modifications
to the Term Asset-Backed
Securities Loan Facility

In May 2009, the Federal Reserve announced some modifications to TALF,
a program administered by the Federal Reserve but part of the President’s
broader strategy to restart lending. As we have previously reported, the
Federal Reserve originally designed TALF to make nonrecourse loans to
fund purchases of asset-backed securities (ABS) that are secured by
eligible consumer and small business loans. 45 The modifications to TALF
include the addition of two asset classes, an extension of certain TALF
loan terms, and additions to the credit rating agencies approved for rating
TALF-eligible collateral.
The additional asset classes accepted for collateral are commercial
mortgage-backed securities (CMBS) and securities backed by insurance
premium finance loans. CMBS are securities backed by mortgages for
commercial real estate, such as office buildings or shopping centers. The
Federal Reserve noted that it had extended the range of eligible collateral
to include CMBS to help prevent defaults on viable commercial properties,
encourage further lending for commercial properties, and encourage the
sale of distressed properties. CMBS issued on or after January 1, 2009, and
“legacy” CMBS issued prior to January 1, 2009, will be accepted. The
Federal Reserve Bank of New York has specified a number of
requirements that must be met before it will accept this collateral—for
example, CMBS must have the highest long-term investment grade credit
rating available from certain credit rating agencies. 46 The Federal Reserve
will include nonlegacy CMBS in its June subscriptions for TALF loans and
legacy CMBS in its July subscriptions. 47 The Federal Reserve also
announced that it would accept securities backed by insurance premium

45

Nonrecourse loans are provided against collateral, and if they go into default the Federal
Reserve assumes control of the pledged assets. However, if a participant in TALF is found
ineligible or misrepresents the eligibility of its collateral, the loan will not be considered
nonrecourse and must be repaid.
46

For additional information on CMBS collateral requirements, see the Web site of the
Federal Reserve Bank of New York at http://www.newyorkfed.org/markets/talf_faq.html.
47

TALF subscriptions for CMBS will occur on a different schedule than for other ABS with
nonlegacy CMBS collateral being first accepted on June 16, 2009, and as announced
thereafter.

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GAO-09-658 Troubled Asset Relief Program

finance loans. 48 These securities will be included to encourage the flow of
credit to small businesses, one of the goals of TALF under the Consumer
and Business Lending Initiative.
Furthermore, the Federal Reserve extended the available terms for certain
TALF loans from 3 years to 5 years to finance purchases of CMBS and ABS
backed by student loans and SBA-guaranteed loans. The Federal Reserve
will limit financing to $100 billion for loans with 5-year maturities. The
volume of loans requested for TALF collateral increased significantly in
May and June 2009, compared with the previous 2 months (table 8).
Additionally, loans requested in March and April 2009 were provided only
on collateral for auto and credit card securitizations, whereas May 2009
subscriptions extended to student loan, small business, and equipment
securitizations for the first time. June 2009 subscriptions included the first
loans requested for securities based on insurance premium finance loans
and servicing advances. The total amount of loans requested on TALFeligible collateral since the program’s first activity is $28.5 billion.
Table 8: Amount of TALF Loans Requested from March through June 2009 by Loan
Type
Dollars in millions
Type of loan

March

April

May

June

Total by loan type

Auto

$1,902

$811

$2,185

$3,307

$8,205

Credit card

2,805

897

5,525

6,223

15,450

Equipment

0

0

456

591

1,047

Floorplan

0

0

0

0

0

Insurance premium
finance

-

-

-

529

529

Servicing advances

0

0

0

495

495

Small business

0

0

87

82

169

Student loan
Total

0

0

2,348

228

2,576

$4,707

$1,708

$10,600

$11,453

$28,467

Source: GAO analysis of information available on the Federal Reserve Bank of New York Web site.

Note: Not all numbers will total due to rounding.

48

Insurance premium finance loans are originated to borrowers for the payment of
insurance premiums.

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On May 19, 2009, the Federal Reserve expanded the number of credit
rating agencies approved for rating TALF-eligible collateral from three to
five. All collateral accepted under TALF, with the exception of ABS
backed by SBA-guaranteed small business loans and related debt
instruments, must receive the highest investment-grade rating from at least
two TALF-eligible rating agencies. Fitch Ratings, Moody’s Investors
Service, and Standard & Poor’s are eligible rating agencies for all ABS.
DBRS, Inc. and Realpoint LLC are two additional TALF-eligible rating
agencies for CMBS collateral.

Treasury and FDIC Are
Taking Steps to Implement
the Public-Private
Investment Program, but
Progress Has Been Slow

As we previously reported, PPIP consists of the Legacy Loans Program
and the Legacy Securities Program. Treasury and FDIC have been
finalizing the terms of the Legacy Loans program. On March 26, 2009, FDIC
announced that it was seeking public comments on a number of elements
of the program. FDIC officials at the time stated that the implementation
date for the program would depend on the nature of the comments
received and the time required to consider them for the design of the
program. FDIC officials with whom we spoke said that the implementation
date of the program remained unclear because of changes to accounting
rules, potential participants’ concerns about having to write-down assets,
and TARP-related restrictions. More recently, on June 3, 2009, FDIC
announced that a previously planned pilot sale of assets by open banks
will be postponed. In making that announcement, the Chairman stated that
banks have been able to raise capital without selling bad assets but that
FDIC will continue to work on the Legacy Loans Program and will be
prepared to offer it in the future. Further, FDIC announced that it intended
to test the Legacy Loans Program funding mechanism in a receivership
assets sale with bids to begin in July. For the Legacy Securities Program,
Treasury is currently reviewing fund manager applications. Treasury
extended the application deadline for these fund managers from April 10,
2009, to April 24, 2009, in part to give small businesses and businesses
owned by veterans, minorities, and women the ability to partner with
larger fund managers in the program. Treasury initially announced that it
anticipated prequalifying about 5 fund managers from about 100
applications; however, it later clarified that more than five fund managers
may be prequalified depending on the number of applications deemed to
be qualified. A public announcement of the selections will be made in June
2009. Treasury officials estimated that it could take the fund managers as
long as 12 weeks to raise capital for the funds and it is difficult to
determine how soon Treasury would be contributing matching capital and
financing to the funds.

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The Administration Has
Announced Small Business
Lending Efforts That Are
in Various Stages of
Implementation

As we previously reported, Treasury, Federal Reserve, and SBA have plans
in place to contribute to the administration’s efforts to improve the
accessibility and affordability of credit to small businesses. Treasury
announced on March 16, 2009, that it would set aside $15 billion of TARP
funds to directly purchase securities based on 7(a) and 504 small business
loans guaranteed by SBA. 49 TALF, managed by the Federal Reserve Bank
of New York, is also a part of the efforts to increase access to credit for
small businesses. Under TALF, securities consisting of SBA-guaranteed
7(a) and 504 small business loans are provided as collateral to the Federal
Reserve, and in return TALF provides loans, with the goal of encouraging
securitizations for SBA-guaranteed debt. 50 For its part, SBA has been
directed under ARRA to implement administrative provisions to help
facilitate small business lending and enhance liquidity in the secondary
markets. These administrative provisions include (1) temporarily requiring
SBA to reduce or eliminate certain fees on 7(a) and 504 loans;
(2) temporarily increasing the maximum 7(a) guarantee from 85 percent to
90 percent; and (3) implementing provisions designed specifically to
facilitate secondary markets, such as extending existing guarantees in the
504 program and making loans to systemically important broker-dealers
that operate in the 7(a) secondary market.
These initiatives are in various stages of implementation. Treasury has not
yet purchased securities related to the Small Business and Community
Lending Initiative, though it had stated that it expected to purchase 7(a)related securities by the end of March 2009 and 504-related securities by
the end of May 2009. A Treasury official said that Treasury has faced
challenges implementing the program because of sellers’ concerns about
warrants and executive compensation, as stipulated under the act, as
amended by ARRA. Treasury is reaching out to these sellers and

49

This $15 billion is referred to as “Unlocking Credit for Small Business” and falls under the
“Small Business and Community Lending Initiative” of Treasury’s Financial Stability Plan.
Separately, SBA has two principal loan guarantee programs, the 7(a) and 504 programs,
which aim to facilitate the accessibility and affordability of financing to small businesses.
Under the 7(a) program, SBA generally provides lenders guarantees on up to 85 percent of
the value of loans to qualifying small businesses in exchange for fees to help offset the
costs of the program. Under the 504 program, which generally applies to small business
real estate and other fixed assets, SBA also provides certified development companies with
a guarantee on up to 40 percent of the financing of the projects’ costs in exchange for fees,
while the small business borrowers and other lenders provide the remaining 60 percent of
the financing with no guarantee. For additional information, GAO-09-507R.

50

TALF efforts fall under the “Consumer and Business Lending Initiative” of Treasury’s
Financial Stability Plan.

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GAO-09-658 Troubled Asset Relief Program

anticipates completing term sheets in June 2009. Federal Reserve efforts
related to small businesses have also started. As shown in table 8, in May
2009, TALF received collateral for and offered loans based on 7(a) and
504-related small business securities for the first time. Loans requested
since May related to these small business securities total about
$169 million. SBA, as we reported to congressional committees, issued
policy notices to temporarily reduce or eliminate certain fees for 7(a) and
504 loans and temporarily increase the maximum 7(a) guarantee, effective
as of March 16, 2009. SBA formalized its implementation of these
provisions in Federal Register notices on June 8, 2009. However, the SBA
has not yet implemented provisions intended to enhance secondary
markets. 51

Citigroup Finalized Its
Previously Announced
Securities Exchange
Agreement on June 9, 2009

On May 7, 2009, Citigroup announced that it would expand its planned
exchange of preferred securities and trust preferred securities for
common stock from $27.5 billon to $33 billion. The stress test found that
Citigroup would need an additional $5.5 billion in tier 1 common capital,
for a total of $58.1 billion, to ensure adequate capital for the more adverse
economic scenario. On June 9, 2009, Treasury and Citigroup finalized their
exchange agreement and Treasury agreed to convert up to $25 billion of its
Treasury CPP senior preferred shares for interim securities and warrants
and its remaining preferred securities for trust preferred securities so that
the institution could strengthen its capital structure by increasing tangible
common equity. As part of the agreement, Citigroup agreed to offer to
convert both privately placed and publicly issued preferred stock held by
other preferred shareholders. To increase the exchange by $5.5 billion,
Citigroup decided to offer to exchange more publicly held preferred stock
and trust preferred securities for common stock. Treasury and Citigroup
finalized the exchange agreement on June 9, 2009. According to OFS
officials, the conversion of the government preferred shares to common
stock will not be finalized until the exchange of $33 billion of preferred
securities and trust preferred securities has been completed. In addition,
Citigroup has taken a number of other actions designed to improve
Citigroup’s capital and financial position including the sale of Nikko
Cordial Securities and a joint venture with Morgan Stanley relating to its
brokerage subsidiary, Smith Barney. See appendix V for additional
information about the condition of Citigroup.

51

For additional details on the type and status of changes from SBA, see GAO-09-507R.

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Citigroup issued its first 2009 quarterly TARP progress report on May 12,
2009. 52 Citigroup reported that it had authorized initiatives to deploy
$44.75 billion in TARP capital. According to the report, $8.25 billion of new
funding initiatives were approved during the first quarter of 2009 to
expand the flow of credit to consumers, businesses, and communities. For
example, Citigroup lent $1 billion to qualified borrowers to help
homeowners refinance their primary residence. According to Treasury
officials, Citigroup issued this report voluntarily and Treasury had not
verified the information it contained.

Treasury Completed
Transactions with AIG
under the Systemically
Significant Failing
Institutions Program

Treasury completed the previously announced restructuring of its support
for AIG by exchanging $40 billion of cumulative Series D preferred shares
for $41.6 billion of noncumulative Series E preferred shares. The amount
of Series E preferred shares is equal to the original $40 billion plus
approximately $733 million in dividends undeclared on February 1, 2009;
$15 million in dividends compounded on the undeclared dividends; and an
additional $855 million in dividends accrued from February 1, 2009, but
not paid as of April 17, 2009. Our tests of selected control activities found
that Treasury had applied adequate financial reporting controls over the
restructuring transaction.
AIG’s restructured agreement kept the quarterly dividend payment dates
of every May 1, August 1, November 1, and February 1 that were
established in the original November 25, 2008, agreement. However, the
restructured agreement also specified that dividends are not payable
within 20 calendar days of the restructuring date and that the dividends for
a period of fewer than 20 days would be payable in the subsequent
dividend period. Accordingly, in compliance with these dividend payment
terms, the dividends for the period from April 17 through May 1, 2009,
which amounted to approximately $150.2 million, are to be included in the
August 1, 2009, scheduled dividend payment.
Treasury also finalized its approximately $30 billion Series F preferred
stock capital facility with AIG on April 17, 2009. 53 In our March report, we

52

“What Citi Is Doing to Expand the Flow of Credit, Support Homeowners and Help the U.S.
Economy,” TARP Progress Report for First Quarter, May 12, 2009.

53
The $30 billion preferred stock capital facility previously announced was reduced by $165
million representing retention payments AIG Financial products made to its employees in
March 2009.

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GAO-09-658 Troubled Asset Relief Program

recommended that Treasury require that AIG seek concessions from
stakeholders—such as management, employees, and counterparties—
including seeking to renegotiate existing contracts, as appropriate, as it
finalized this agreement. While Treasury extended negotiations several
weeks, the negotiations did not result in material changes to the final
agreement. According to Treasury, AIG had been consulting with Treasury
on any substantial compensation payments until interim final executive
compensation rules were issued on June 10, 2009.

Government Investment
and Involvement in the
Auto Industry Grows as
Chrysler and GM Continue
to Take Steps toward
Restructuring

Since we last reported on the Automotive Industry Financing Progarm
(AIFP), 54 Treasury has provided additional funding to the auto industry,
including amounts to assist GM and Chrysler, which have filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code,
bringing Treasury’s total commitments under this program to
approximately $82.6 billion. 55 Treasury committed to providing additional
funding to support the companies both during and after their respective
reorganizations, in the amounts of $8.5 billion for Chrysler and $30.1
billion for GM. In exchange for providing this funding, Treasury is to be
repaid over a period of years for a portion of the amounts provided and
will receive equity ownership in Chrysler and GM. Table 9 shows the
amounts Treasury has provided or committed to providing under AIFP and
its plans for being repaid for or otherwise recovering this funding.

54

GAO reported separately on the federal assistance to the auto industry. See GAO,
GAO-09-553.

55

On April 30, 2009, Chrysler and its subsidiaries filed voluntary petitions under Chapter 11
of the U. S. Bankruptcy Code, and on June 1, 2009, GM and its subsidiaries filed voluntary
petitions under Chapter 11 of the bankruptcy code. Both companies filed with the U.S.
Bankruptcy Court, Southern District of New York.

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GAO-09-658 Troubled Asset Relief Program

Table 9: U.S. Treasury Assistance to the Auto Industry
Dollars in billions
Description of funding
Loans to Chrysler prior to
bankruptcy filing

Amount
$4.0

Assistance to the restructured
Chrysler after bankruptcy filing

Treasury’s plans for recovery
$500 million—the portion secured by a senior lien on Mopara—will be assumed
under the restructured Chrysler’s loan agreement (see row below).

8.5

$7.1 billion will be repaid as a term loan, including $5.1 billion to be repaid within
8 years and $2 billion to be repaid within 2.5 years. The loan is secured with a
senior lien on all of the restructured Chrysler’s assets. Treasury also received a
9.85 percent equity share in the new company. Treasury also set aside $350
million of the $8.5 billion for a loss-sharing provision and is not expected to be
initially drawn.

Assistance to GM prior to
bankruptcy filing

19.4

Treasury will receive $6.7 billion debt to be repaid as a term loan, $2.1 billion in
preferred stock, and 61 percent equity in the new company.

Estimated assistance to the
restructured GM after
bankruptcy filing

30.1

Supplier Support Program
Chrysler

1.5

GM

3.5

Warranty Commitment Program
Chrysler

0.3

Amounts provided to Chrysler and GM are due to be repaid in April 2010.

GM

0.4

Assistance to auto finance
companies Chrysler Financial
and GMAC

14.9

Total assistance to Chrysler
and GM

Treasury expects that Chrysler and GM will be able to continue to support their
warranties and will not need the funds provided under these programs. The funds
will be returned to Treasury.
Plans for recovery vary based on assistance provided.

$82.6
Source: GAO analysis of Treasury information.
a

Mopar is Chrysler’s parts business.

In the case of Chrysler, on April 30, 2009, the White House announced that
Treasury would provide more than $8 billion in additional funding to help
finance Chrysler’s operations through bankruptcy and that Chrysler would
attempt to arrange an alliance with the Italian automaker Fiat as part of its
restructuring. On June 1, 2009, a bankruptcy judge approved Chrysler’s

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GAO-09-658 Troubled Asset Relief Program

restructuring proposal, including the alliance with Fiat, the sale of its
assets to the new Chrysler, and the additional funding from Treasury. 56
On June 9, 2009, the asset sale was finalized, and Treasury executed a loan
agreement with the restructured Chrysler under which the company will
be required to repay Treasury $7.1 billion, secured by a senior lien on all of
the new Chrysler’s assets. This new loan includes $500 million of the
prebankruptcy loan that was secured by a senior lien on Mopar—
Chrysler’s parts business. Although Chrysler signed a loan agreement with
Treasury for the entire $4.0 billion of the prebankruptcy loan, Treasury
officials said that the U.S. government will likely recover little of this
amount because other debt holders have seniority for being repaid.
However, in further consideration of the funding to the restructuring of
Chrysler, Treasury is initially receiving a 10 percent equity stake in the
new company.
In the case of GM, on June 1, 2009, Treasury announced that it would
make $30.1 billion of financing available to support an expedited
bankruptcy proceeding and to transition the new GM through its
restructuring plan. If GM’s restructuring proposal is approved by the
bankruptcy court—in exchange for the $30.1 billion in bankruptcy funding,
as well as the $19.4 billion in prebankruptcy funding—the U.S. government
would receive about $6.7 billion of debt, $2.1 billion in preferred stock,
and approximately 61 percent of the equity in the new GM. At the present
time, Treasury said it does not plan to provide additional assistance to GM
beyond this commitment.
As part of the companies’ reorganization, they have also reached
agreements with other stakeholders to resolve outstanding obligations,
including by offering these stakeholders equity shares in the companies.
The agreements with each stakeholder group are discussed in more detail
in the following paragraphs, and the companies’ equity ownership
following restructuring is shown in figure 2.

56

An appeal had been filed with the U.S. Court of Appeals for the Second Circuit contesting
the bankruptcy court’s approval of the proposed asset sale under § 363 of the bankruptcy
code. On June 5, 2009, the Court of Appeals affirmed the bankruptcy court’s decision but
stayed the asset sale until June 8, 2009. On June 6, 2009, some of Chrysler’s creditors
requested the U.S. Supreme Court to review and issue an emergency stay of the asset sale
orders, and on June 8, 2009, Justice Ginsburg granted a temporary stay. On June 9, 2009,
the Supreme Court removed the temporary stay and declined further review, allowing the
asset sale to proceed.

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GAO-09-658 Troubled Asset Relief Program

Figure 2: Equity Ownership in Chrysler and GM after Restructuring
GM’s equity ownershipc

Chrysler’s equity ownership

2.5% Canadian
governmentsa

10.0%

U.S. Treasury

9.9%

Unsecured
creditorsd

11.7%

Canadian
governmentsa

17.5%

GM VEBAe

Fiatb

20.0%

60.8%
67.7%
Chrysler VEBA

U.S. Treasury
Source: GAO analysis of Department of Treasury information.
a

The Canadian and Ontario governments will both receive equity in the new Chysler and GM.

b

Fiat will have the right to earn up to 15 percent in additional equity in three tranches of 5 percent—
each in exchange for meeting performance metrics, including introducing a vehicle produced at a
Chrysler factory in the United States that performs at 40 miles per gallon; providing Chrysler with a
distribution network in numerous foreign jurisdictions; and manufacturing state-of-the-art, next
generation engines at a U.S Chrysler facility. Fiat will also hold an option to acquire up to an
additional 16 percent fully diluted equity interest in the restructured Chrysler. Fiat may exercise this
option once Treasury’s loan has been repaid in full.
c

GM’s new equity ownership structure will be finalized pending the decision of the bankruptcy court.
Ownership percentages assume warrants granted to unsecured creditors and the United Auto
Workers’ VEBA are exercised.

d

Unsecured creditors would receive warrants to acquire an additional 15 percent of the new GM.

e

•

The GM VEBA would receive warrants to acquire an additional 2.5 percent of the new GM.

Auto workers and retirees: The International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America
reached agreements separately with Chrysler and GM on modifications to
the existing labor contract, as specified by the terms of Treasury’s
prebankruptcy loans to the companies. The agreements will be applicable
to the reorganized companies. Chrysler and GM also developed plans to
meet their obligations for funding their retiree healthcare funds, also
known as voluntary employee beneficiary associations (VEBA). In the
case of Chrysler, the VEBA will be funded by a note of $4.6 billion and will

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GAO-09-658 Troubled Asset Relief Program

receive 55 percent of the new company’s fully-diluted equity. In the case of
GM, the company will fund its VEBA trust with a $2.5 billion note,
$6.5 billion in preferred stock, 17.5 percent of the equity in the new GM,
and warrants to purchase an additional 2.5 percent of the company. Both
GM and Chrysler VEBAs will have the right to select one independent
director for their respective company’s board, but will have no other
governance rights. Regarding the companies’ pension plans, as we have
previously reported, the termination of either company’s plans would
result in a substantial liability to the federal Pension Benefit Guaranty
Corporation (PBGC), which insures private-sector defined benefit pension
plans. However, at this time, the companies do not intend to terminate
their plans, which will be transferred to the new companies as part of the
reorganization.
•

Canadian government: The Canadian government will provide
restructuring funding to and become a shareholder of both companies. In
total, the Canadian government has provided $3 billion to Chrysler and
will hold $1.9 billion in debt and a 2.5 percent equity stake in the
reorganized company. 57 For GM, the Canadian government will fund
$9.5 billion in exchange for $1.7 billion in debt and preferred stock and
approximately a 12 percent equity stake in the new GM. As a shareholder
the Canadian government will have the right to select members of
Chrysler’s and GM’s boards of directors. 58

•

Former shareholders and creditors: In the case of Chrysler, Daimler
AG and Cerberus Capital, which together held 100 percent of Chrysler’s
prebankruptcy equity and $4 billion of Chrysler’s debt, will relinquish their
equity stakes and waive their share of debt holdings. 59 Chrysler’s largest
secured creditors agreed to exchange their portion of the $6.9 billion
secured claim for a proportional share of $2 billion in cash. In the case of
GM, bondholders representing more than half of GM’s $27.1 billion in
unsecured bonds have agreed to exchange their portion of bonds for
10 percent equity and warrants for an additional 15 percent in the
restructured company. About $6 billion in debt held by GM’s secured bank

57

Amounts are in U.S. dollars.

58

In both cases, the shareholders are the governments of Canada and Ontario.

59

Additionally, Daimler AG will pay $600 million to Chrysler’s pension funds to settle its
obligation to the PBGC and Cerberus will contribute a claim it had against Daimler to assist
in the Daimler settlement with the PBGC.

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GAO-09-658 Troubled Asset Relief Program

lenders will be repaid from proceeds of the loan GM received from
Treasury and the Canadian government after it filed for bankruptcy.
•

Fiat: As part of the alliance, Fiat has contributed intellectual property and
“know how” to the new Chrysler in exchange for a 20 percent equity share
in the reorganized company. Fiat also has the right to select three
directors for the reorganized company and the right to increase its
ownership incrementally up to a total of 35 percent.
As a shareholder of the reorganized companies, as well as a lender,
Treasury will continue to have a monitoring and oversight role. For
instance, Treasury will have the right to appoint four independent
directors to Chrysler’s board and five directors to GM’s board. 60 However,
Treasury officials told us they do not plan to play a role in the
management of the companies following the selection of these directors.
In addition, the companies are to meet the following requirements:

•

Establish internal controls to provide reasonable assurance that they are
complying with the conditions of the loan agreements relating to executive
compensation, expense policy reporting, asset divestiture, and compliance
with the Employ American Workers Act, and report to Treasury each
quarter on these controls.

•

Collect and maintain records to account for their use of government funds
and their compliance with the terms and conditions under the Auto
Supplier Support Program and other federal support programs.

•

Provide Treasury with periodic financial reports.
Treasury officials said that they plan to require Chrysler and GM to submit
monthly reporting packages containing the above items and to meet with
the companies quarterly. They said that Treasury’s involvement in the
companies will be on a commercial basis and that their interest is in
ensuring the companies are in a position to repay the loans.
We have previously reported that in a market economy, the federal role in
aiding industrial sectors should generally be of limited duration and have
noted the importance of setting clear limits on the extent of government

60

The number of directors Treasury has the right to appoint varies based on the amount of
GMAC LLC equity that Treasury owns at a given time.

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GAO-09-658 Troubled Asset Relief Program

involvement. 61 Regarding assistance provided to the auto industry,
Treasury should have a plan for ending its financial involvement with
Chrysler and GM that indicates how it will both divest itself of its equity
shares—and the attendant responsibilities for appointing directors to the
companies’ boards—and ensure that it is adequately repaid for the
financial assistance it has provided. In developing and implementing such
a plan, it should weigh the objective of expeditiously ending the
government’s financial involvement in the companies with the objective of
recovering an acceptable amount of the funding provided to these
companies. Treasury has taken steps in this direction, including
establishing repayment terms for the loan provided to the new Chrysler as
part of its reorganization and developing plans to sell its equity in the
companies over a period of years in a manner calculated to maximize its
value. We plan to monitor Treasury’s efforts to develop and implement a
plan for ending the government’s financial involvement with the
automakers and will report our findings in future reports as appropriate.

Treasury Provides Funding to
GMAC LLC to Assist in Auto
Financing to Chrysler Dealers
and Customers and to Address
Capital Needs Identified under
SCAP

In April 2009, Chrysler filed for bankruptcy. On May 20, 2009, the
bankruptcy court approved GMAC LLC (GMAC) as the preferred provider
of new credit to Chrysler’s dealers and customers. 62 Also in May 2009, the
Federal Reserve through SCAP identified the need for GMAC to raise
additional capital to be in compliance with SCAP results.
The federal government indicated that it would provide additional
assistance to GMAC to support GMAC’s ability to originate new loans to
Chrysler dealers and consumers and help address GMAC’s capital needs as
identified under SCAP. 63 On May 21, 2009, Treasury purchased $7.5 billion
of mandatorily convertible preferred membership interests from GMAC
with an annual 9 percent dividend, payable quarterly. Treasury’s
$7.5 billion investment included $4 billion to support GMAC and address
its capital needs as identified through SCAP, which identified a need of
$9.1 billion of new capital. After 7 years, the interests must be converted to

61

GAO-09-553, Auto Industry: A Framework for Considering Federal Financial
Assistance, GAO-09-247T (Washington, D.C.: Dec. 5, 2008), and Auto Industry: A
Framework for Considering Federal Financial Assistance, GAO-09-242T (Washington,
D.C.: Dec. 4, 2008).

62

GMAC specializes in automotive finance, real estate finance, insurance, commercial
finance, and online banking. As of March 31, 2009, GMAC had $180 billion in total assets.

63

On December 29, 2008, Treasury purchased $5 billion of senior preferred membership
interests from GMAC.

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GMAC common interests. Prior to that time, they may be converted at
Treasury’s option upon specified corporate events (including public
offerings). The shares may also be converted at GMAC’s option with the
approval of the Federal Reserve, though any conversion at GMAC’s option
must not result in Treasury owning in excess of 49 percent of GMAC’s
common membership interests, except (1) with prior written consent of
Treasury, (2) pursuant to GMAC’s capital plan, as agreed upon by the
Federal Reserve, or (3) pursuant to an order of the Federal Reserve
compelling such a conversion. On June 8, 2009, GMAC submitted a
detailed capital plan to the Federal Reserve describing specific actions it
has taken and plans to take to increase capital to meet its total SCAP
capital needs.
Under the agreement, GMAC also issued warrants to Treasury to purchase
additional mandatorily convertible preferred membership interests in an
amount equal to 5 percent of the preferred purchased membership
interests. The warrant preferred shares provide an annual 9 percent
dividend payable quarterly. According to Treasury, because the exercise
price for the warrants is nominal and there were no downside risks to
exercising the warrants immediately, Treasury exercised the warrants at
closing and received an additional $375 million of mandatorily convertible
preferred membership interests. Under the funding agreement, GMAC
must comply with all executive compensation and corporate governance
requirements of Section 111 of the act applicable to qualifying financial
institutions under CPP.
Treasury noted that the May 21, 2009, $7.5 billion capital investment would
not immediately result in it holding any common membership interests in
GMAC at that time. However, on May 29, 2009, Treasury exercised its
option to exchange the $884 million loan it made to GM in December 2008
to acquire about 35 percent of the common membership interests in
GMAC.

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Treasury Has Continued to
Take Steps to Develop an
Integrated Communication
Strategy for TARP, but
Additional Actions Could
Help Ensure the Strategy
Is Effective

In our March 2009 report, we noted that while Treasury had taken a
number of steps to address the ongoing crisis, it had been hampered with
questions about TARP decision making and activities, raising questions
about the effectiveness of its existing communication strategy. 64 As a
result, we recommended that Treasury continue to develop an integrated
communication strategy that may include, among other things, building
understanding and support through the program, integrating
communications and operations, and increasing the impact of
communication tools such as print and video. Moreover, we emphasized
the need for the communication strategy to establish a means to engage in
regular and routine communication with Congress. Since our March 2009
report, Treasury said that it established a working group to address
communications both within OFS and to external stakeholders. Treasury
has stated that the working group is responsible for monitoring, reporting
on, and addressing all OFS communication efforts, and has been
developing a communications plan to build support for the various
programs it has established under the act. Treasury also noted that its
Financial Stability Plan provided the basis for its improved communication
strategy.
The current communication strategy for TARP utilizes and builds on
existing resources, such as Treasury’s Office of Public Affairs and Office of
Legislative Affairs. Officials from Treasury’s Office of Public Affairs and
Office of Legislative Affairs told us that the Financial Stability Plan
announced in February 2009 provided a base for the new administration
launching its current communication strategy. To ensure that Treasury can
communicate with the public and Congress in a timely manner, officials
from Treasury’s Office of Public Affairs and Office of Legislative Affairs
are included in regular policy meetings with OFS officials and officials
from other offices in Treasury. As major changes occur, Treasury’s Office
of Public Affairs—in conjunction with OFS, the Office of the Secretary,
and the Office of Legislative Affairs—has established a routine approach
to more fully communicate activities to the public. Specifically, the Office
of Public Affairs has a process that involves timely issuance of press
releases and white papers, holding media briefings, and conducting
outreach to the academic and investor community. According to Treasury,
policy officials from OFS and Domestic Finance are involved in this
process. Moreover, the Office of Public Affairs told us that Treasury had

64

GAO-09-504.

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GAO-09-658 Troubled Asset Relief Program

dedicated a media and public affairs employee that works on TARP and in
coordination with other senior members of the Public Affairs office.
Staff from the Office of Legislative Affairs told us that they routinely
communicate with congressional leadership and staff from key
committees with jurisdiction over TARP activities, specifically noting the
Senate Committee on Banking, Housing, and Urban Affairs and the House
Committee on Financial Services. They also respond to a variety of
questions and requests made to them by individual members’ and
congressional staff on an ongoing basis. In addition, Treasury noted that
on April 15, 2009, the Secretary transmitted written letters to
congressional committees to provide a broad update on TARP-related
activities, and on May 15, 2009, OFS staff provided background briefings to
Congressional staff on TARP programs and recent developments. OFS told
us they plan to provide additional briefings to congressional staff on a
monthly basis. They also said that they are in the process of hiring a
communications officer to work with the Office of Public Affairs and the
Office of Legislative Affairs, who have two staff members dedicated to
TARP, among other duties, to implement a coordinated communications
strategy. Though these efforts may improve communication with
congressional stakeholders, Treasury has yet to implement an approach
that ensures all relevant stakeholders are routinely reached. For example,
the act creating TARP includes several other committees of jurisdiction
besides Senate Banking, Housing, and Urban Affairs and House Financial
Services—the House and Senate Committees on Appropriations, the
House and Senate Committees on Budget, the Senate Committee on
Finance, and the House Committee on Ways and Means. However,
according to Treasury officials, while they have more recently begun to
outreach to others, their efforts have primarily been targeted to House
Financial Services and Senate Banking. Treasury’s communication
strategy, once finalized, should help ensure regular and proactive outreach
to all of the committees of jurisdiction and Congress in general. Until the
plans for regular outreach to Congress on TARP matters are implemented,
Treasury risks that some congressional committees or staff may not be
receiving consistent and timely information, increasing the likelihood of
misunderstanding by Congress and according to Treasury officials, will
continue to be inundated with ad hoc TARP-related inquires.
Since our March 2009 report, Treasury has made operational its new Web
site, www.financialstability.gov, to report TARP-related matters and has
taken steps to improve the site’s effectiveness through the use of various
communication tools. Treasury said that this effort is part of a refocused
public communications initiative to enhance communications on how

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TARP strategies will stabilize the financial system and restore credit
markets. According to Treasury, there are several key differences between
the new site and the older Web page used to communicate TARP
strategies, which was a part of the Treasury’s Web site. Specifically,
Treasury officials told us that the new site is less technical than the former
Web page and the intention was to provide details on TARP activities in a
more user-friendly, simplified manner that is easier for the general public
to understand. For example, the site features a “decoder” tool that
translates frequently-used financial language and TARP program names,
such as “asset-backed security,” to reach a wider audience. In addition, the
site has provided information on all of the investments Treasury has made
and the contractual terms of and participants in those investment
programs. Treasury also posts a detailed monthly lending and
intermediation survey on the Web site. Moreover, Treasury has provided
links to program-related content provided on other federal agencies’ sites,
such as frequently asked questions on the TALF posted by the Federal
Reserve. Treasury has also tried to provide information to better address
constituent interests. For example, the Web site has included an
interactive map illustrating state-by-state bank and financial institution
funding provided under TARP. According to Treasury, the site provided
some information on warrant sales and repayments of principal
investments made to various institutions under CPP. Consistent with our
recommendation aimed at better disclosure of monies paid to Treasury, it
now includes dividends and interest received in its periodic reports to
Congress that are also posted to the Web site, and according to Treasury,
it is in the process of creating a mechanism to report dividends received
under the various TARP programs on the Web site.
Treasury also created a separate Web site—
www.makinghomeaffordable.gov—in order to communicate about the
homeownership preservation program established under TARP. Treasury
said that it has coordinated closely with the White House, HUD, FHFA,
Fannie Mae, and Freddie Mac in developing a means to communicate
information on the Making Home Affordable program to stakeholders
across the country. The Web site includes information targeted to
homeowners on refinancing and loan modifications and, according to
Treasury, as of May 29, 2009, the site has received more than 19.5 million
hits.
In other work, we have noted that best practices useful for improving the
quality of federal public Web sites include conducting usability testing of
Web sites and developing performance measures or other means to gauge
customer satisfaction, such as conducting surveys and convening focus

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GAO-09-658 Troubled Asset Relief Program

groups. 65 Treasury is in the process of entering into an agreement with a
vendor to conduct usability testing of the Web site. According to a
Treasury official, small surveys of site visitors will be conducted and every
six months the vendor will suggest changes to improve the Web site. While
Treasury said that the new Web site was designed to make information
less technical and accessible to a wider audience, until Treasury gauges
whether the new www.financiastability.gov Web site provides more useful
and easily found information to the general public than the old Web page,
Treasury lacks a meaningful measure of the effectiveness of its
communication strategy.
The lack of ready access to key information on some recent TARP
developments on the new www.financialstability.gov Web site
underscores the need to seek input from others in making continuous
improvements in TARP-related communications. For example, users from
the general public, unfamiliar with the TARP terminology, would have
difficulty finding basic descriptive information on the stress test initiative
announced February 2009 under the administration’s Financial Stability
Plan. Among other things, we found that the Web site lacked readily-found
information on the components of the test and test results. Further, while
Treasury officials said that the decoder tool intends to translate more
technical program information, as of June 4, 2009, we found no
information in the decoder tool or elsewhere on the Web site to let users
know that the stress test is now formally referred to in Treasury press
releases as SCAP.

Treasury Has Made
Progress in
Developing OFS’s
Management
Infrastructure

Since our March 2009 report, Treasury has continued to take steps to hire
permanent OFS staff and detailees to fill short- and long-term
organizational needs. First, Treasury has continued to seek qualified
successors for various permanent leadership positions, including the Chief
Investment and Chief Homeownership Preservation officers. Until
permanent successors are identified, Treasury has appointed an Acting
Chief Investment Officer and appointed an interim Chief Homeownership
Preservation Officer to head these areas of OFS. In addition, Treasury has
created a new senior position within OFS—a senior restructuring
official—to oversee major investments that have been made under TARP.
The administration has also nominated an individual to become the
Assistant Secretary of Financial Stability. This appointment, which is

65

GAO-09-638T.

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subject to Senate confirmation, would fill the vacancy created by the
departure of the Interim Assistant Secretary of Financial Stability, who
had served in this capacity since TARP was created in October 2008.
Second, Treasury has increased the number of permanent OFS staff. As of
June 8, 2009, OFS had 166 total staff, with the number of permanent staff
rising from 77 to 137 since our March 2009 report and the number of
detailees decreasing to 29 (see fig. 3). In its latest budget request to OMB,
Treasury anticipated that OFS would need 225 full-time employees to
operate at full capacity in fiscal year 2010, an increase of 29 from its March
2009 estimate of 196. Having both detailees and long-term staff helps OFS
meet its short- and long-term needs. Treasury continues to anticipate that
permanent staff will support long-term responsibilities, while detailees will
continue to play an important role by supporting the flexibility of OFS
operations.
Figure 3: Number of Permanent Staff and Detailees, November 21, 2008, through
June 8, 2009
Number of employees
180
166
29

160
140

137
120

113
36

100

90
52

80

77
60
40

48
43

38
20

5

0

Nov. 21,
2008
Date

Jan. 26,
2009

Mar. 16,
2009

June 8,
2009

Staff detailed to OFS from other areas of Treasury and other federal agencies (temporary)
Permanent staff (including limited-term appointments)
Source: GAO analysis of Treasury data.

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Currently, some offices are more fully staffed than others. OFS provided
information on 2 types of vacancies—ones the agency is currently in the
process of hiring for (current vacancies)—and ones that the agency
anticipates based on the projected size of each office over time
(anticipated vacancies). While the offices of the Chief Financial Officer
and Chief Investment Officer have identified only a few current vacancies,
the offices of the Chief Risk and Compliance Officer and Chief
Homeownership Preservation Officer have identified several current
vacancies (table 10). Current vacancies that Treasury has identified within
OFS include senior positions for program compliance within the office of
the Chief Risk and Compliance Officer and leadership positions for data
analysis and communications and marketing within the office of the Chief
Homeownership Preservation Officer. In some instances, OFS has filled
important personnel gaps. For example, since our March 2009 report, OFS
has filled two new staff positions for program and data management
analysts to support its oversight of financial agents. 66
Table 10: Number of Permanent Staff and Detailees, as of June 8, 2009
Permanent
staff

Functional area of OFS
Chief Risk and Compliance Officer

Detailees

Current
vacancies

Anticipated
vacancies

18

2

16

8

6

Chief Homeownership Preservation Officer

3

16

3

Chief Operations Officer

19

9

8

2

Chief Investment Officer

43

14

8

14

Chief Financial Officer

18

1

7

0

104

29

55

27

Total
Source: OFS, Treasury.

Note: The table only shows staffing levels and vacancies for selected areas of OFS. Current
vacancies are ones that OFS is currently in the process of bringing on board. Anticipated vacancies
are ones that the agency believes it will have based on the projected size of each office over time.

Treasury has made progress in developing a more routine process for
hiring OFS staff. During the transition from the previous administration,
with new TARP responsibilities still emerging and OFS functional areas
still developing, Treasury employed an informal approach to hiring staff in
order to bring employees on board expeditiously and meet immediate
mission needs. As TARP activities have solidified and become more stable,

66

OFS also has plans to hire three additional analysts and an Acquisition Program Manager
to support oversight of its financial agents.

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Treasury and OFS staff have been better able to identify the skills and
abilities OFS needs and develop a more structured process for hiring.
Currently, Treasury routinely updates its Web site,
www.financialstability.gov, to inform potential candidates of new OFS
vacancies. These vacancy announcements are linked to job
announcements posted on the USAJOBS Web site. Additionally, Treasury
has developed more systematic approaches to reviewing applications and
interviewing candidates. For example, Treasury recently updated its
standard operating procedures for hiring staff to OFS. This includes a
procedure describing how to bring on board federal employees to serve as
detailees in OFS. While Treasury has developed more formal processes for
assessing candidates seeking employment with OFS, the department still
uses flexible hiring strategies in order to ensure that it is recruiting
candidates with the right skill sets and abilities to meet OFS mission
needs. For example, Treasury still utilizes the flexibilities provided under
direct hire authority to select candidates for employment who do not
submit formal applications via www.usajobs.gov. Nonetheless, Treasury
officials said that they encourage all candidates expressing interest in OFS
employment to apply via announcements posted on www.usajobs.gov
whenever feasible. In addition, to retain critical skills learned on the job,
Treasury has established a process to ensure knowledge transfer between
outgoing and incoming OFS detailees.
Treasury continues to experience challenges in hiring qualified employees,
however, in part due to pay disparities with federal financial regulatory
agencies. In the past, Treasury told us that it had identified candidates
with the right skills and abilities to fill various OFS positions, but these
candidates often worked for financial regulators that could offer more
competitive salaries than OFS. To mitigate the effects of pay differences,
Treasury has employed some strategies that are available to all federal
agencies. In particular, Treasury has utilized maximum payable rates and
offered promotions to mid-level career employees. 67 According to
Treasury, these incentives have been helpful in hiring some employees
who had previously worked at financial regulatory agencies. Nonetheless,
Treasury noted that while these tools have been useful in attracting lowerand mid-level career employees, they do not always address substantial

67
The maximum payable rate rule allows an agency to set pay at a rate above that which
would normally apply, based on the higher rate of pay the employee previously received in
another federal job. The pay set, however, may not exceed the highest rate for the general
schedule grade to which the employee would be entitled under normal pay-setting rules.
See 5 C.F.R. Part 531.221.

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GAO-09-658 Troubled Asset Relief Program

differences between the compensation OFS can offer senior executives
and the rates offered by financial regulators. In addition, while the
department has the ability to use recruitment bonuses, use of this
incentive has been limited to employees who are not currently government
employees and therefore has not been used to recruit employees from
financial regulatory agencies. 68 Moreover, while Treasury may use
relocation bonuses, its use of these for recruiting employees from financial
regulatory agencies has been limited because most candidates currently
working for financial regulatory agencies would not have to relocate to
accept a position in OFS.

Treasury Has Taken
Various Steps to Manage
Potential Conflicts of
Interest among TARP
Employees

As mentioned in our prior work, Treasury has told us that vetting OFS
candidates’ potential conflicts of interest has added time to the hiring
process. In particular, there has been heightened concern about
employees’ financial interests creating potential conflicts because TARP
decision-making activities often involve providing funds to various
financial institutions and targeting assistance to certain types of
investments (such as mortgage-backed securities) that new employees
might hold.
Treasury officials told us they had taken a number of steps to manage
potential conflicts of interest. First, Treasury officials have been obtaining
information on candidates’ potential conflicts earlier in the hiring process,
through preliminary reviews of information provided on financial
disclosure reports. OFS employees are subject to the same laws and
regulations covering ethical codes of conduct as employees of other
executive branch agencies. Accordingly, OFS employees are prohibited
from participating personally and substantially in a particular matter that
will affect their financial interests or those of (1) a spouse or minor child;
(2) a general partner; (3) an organization for which they serve as an
officer, director, trustee, general partner or employee; or (4) a person with
whom they are negotiating for employment or have an arrangement
concerning prospective employment. 69

68

Federal regulations currently limit use of recruitment bonuses to individuals hired from
outside the federal government. See 5 C.F.R. Part 575 Subpart A.
69

18 U.S.C. § 208(a); 5 C.F.R. §§ 2635.401-403; 5 C.F.R. pt. 2640. 101.Certain investments are
exempt from this prohibition, including investments in securities that are valued at $15,000
or less and, regardless of their value, diversified interests in mutual funds and investment
trusts.

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In accordance with the Ethics in Government Act, Senate-confirmed
appointees, members of the Senior Executive Service, and other seniorlevel executive branch employees must disclose assets and other interests
that are attributable to them when beginning federal service and annually
thereafter in a public financial disclosure report. 70 Other OFS employees
whose duties involve the exercise of significant discretion are required by
regulation to report their financial interests on a confidential financial
disclosure report (see table 11). Employees required to file a financial
disclosure report must do so within 30 days of appointment, unless
granted an extension. Treasury said it had obtained and retained a copy of
the financial disclosure reports filed by detailees with their home
agencies. 71
Table 11: Description of Financial Disclosure Reports Filed by OFS Employees
Report title

Type of official filing report

Information required

Public financial
disclosure reporta

Senate-confirmed appointees,
members of the senior-executive
service and other senior-level
employees

List specified financial interests including outside income or gifts,
assets, and liabilities and identify the value of and income generated
by each interest by dollar ranges. Reports of transactions required
on an annual basis.

Confidential financial
b
disclosure report

Other staff whose duties involved the
exercise of significant discretion

List specified financial interests held; no requirement to specify
values of assets or income amounts. No transaction reporting
required.

Source: GAO.
a

A blank version of this report may be accessed via Office of Government Ethics Web site. See
http://www.usoge.gov/forms/sf278.aspx.

b

A blank version of this report may be accessed via Office of Government Ethics Web site. See
http://www.usoge.gov/forms/form_450.aspx.

Treasury has used databases to track reviews of Treasury employee
financial disclosure reports. These databases provide sufficient evidence
to demonstrate that, in general, OFS employees have filed financial
disclosure reports within 30 days of their appointment. We found that in
all but two cases, individuals required to complete these reports filed them

70

5 U.S.C. App. § 101.

71

We did not review information on OFS detailees’ filing of confidential financial disclosure
reports because they were already required to file these with their home agencies and were
not new filers.

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within 30 days of their appointment to OFS. 72 In one case, the employee
was granted an extension to file and filed before the expiration of the
extension period. In the other case, the employee appears to have
submitted the report on time, but it was not officially marked as received
by Treasury ethics counsel until 1 business day after the expiration of the
30-day time-to-file period.
Our analysis also supports Treasury’s statement that it usually vets
conflicts of interest earlier in the hiring process for OFS staff than for
employees in other areas of Treasury. We found that, on average,
permanent OFS employees required to submit confidential financial
disclosure reports filed them about 21 days before their appointment.
Moreover, we found that the majority of OFS employees coming from
outside the federal government who were required to submit public
financial disclosure reports filed the reports in advance of their
appointment to OFS.
To address the unique aspects of TARP operations in its reviews of OFS
employees’ financial disclosure reports, Treasury established new internal
operating procedures on February 17, 2009, concerning the submission
and review of OFS employees’ confidential financial disclosure reports. To
facilitate a preliminary identification and communication of obvious
potential conflicts, the new procedures set out as a goal to have OFS
candidates submit for initial review confidential financial disclosure
reports with Treasury ethics counsel before their formal appointment to
OFS. Generally, Treasury has followed this new procedure. In our review,
we found that of the 31 employees filing confidential financial disclosure
reports who were appointed to OFS on or after February 17, 2009,
Treasury ethics counsel received copies of such reports in advance of the
candidate’s appointment to OFS in all but three cases. The new
procedures outlined plans for Treasury ethics counsel to better coordinate
with OFS supervisors during their reviews of confidential financial

72

In reviewing whether a report was filed on time, we determined that the date the report
was marked as received by Treasury ethics counsel to be the date the report was “filed.”
We reviewed information in the database tracking information on 56 permanent employees
filing confidential financial disclosure reports and 8 employees filing public financial
disclosure reports. We were unable to determine the timeliness of a confidential financial
disclosure report filing for 1 employee because certain key dates were missing and the date
of appointment entered did not reflect the employee’s appointment to OFS but instead to
another area of Treasury.

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disclosure reports submitted by OFS candidates. 73 Treasury officials said
that the new coordination effort was helpful because OFS mission staff
were often more familiar with the day-to-day roles and responsibilities of
employees directly under their supervision. One of the tracking databases
provides some evidence to support Treasury’s assertion that it routinely
coordinates reviews of employees’ financial interests with OFS mission
staff. Specifically, the database includes a field that tracks the dates of
supervisory OFS staff reviews of confidential disclosure reports. In
reviewing the database, we identified several instances in which OFS
supervisors had reviewed confidential financial disclosure reports within a
few days of the Treasury ethics counsel’s initial review. We found that for
42 permanent employees, OFS supervisors reviewed confidential financial
disclosure reports, on average, 5 days after Treasury’s ethics counsel first
received the reports. However, the supporting information is somewhat
limited because the supervisory review field was incomplete for 14 of the
56 database pages we reviewed. Treasury’s ethics counsel told us that this
information was absent most often because of a lag in data entry.
Specifically, Treasury said that dates might be entered into the database
some time after the reviews were complete because supervisory mission
staff might retain the reports for extended periods to, among other things,
track potential conflicts identified in the reports and help ensure that
employees recuse themselves from matters in which they had a financial
interest.
Treasury provides various types of training to employees to help them
understand conflicts of interest and ensure compliance with ethical
standards of conduct. According to Treasury, this training is more rigorous
for employees whose jobs have higher potential to involve financial or
other conflicts. Treasury officials said that all employees receive group
training at orientation and certain employees whose positions are of a
more sensitive nature are provided one-on-one training with an ethics
officer. The databases also support Treasury’s statement that it provided
both individual and group-based ethics training to OFS staff. Specifically,
we found that as of April 23, 2009, all OFS staff who completed financial
disclosure reports had received at least one ethics training session and
almost half had received two or more types of ethics training sessions.
While one database lacked some information on specific training dates, it

73

According to a Treasury ethics official, the department did not establish any new
procedures for vetting public disclosure reports since Treasury already extensively reviews
these reports.

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GAO-09-658 Troubled Asset Relief Program

did provide some information on types of training provided to these
individuals (such as one-on-one training with ethics officers, makeup
training sessions, or group training conducted at orientation).
OFS uses a variety of other measures to manage potential conflicts of
interest. Federal law permits Treasury to authorize a waiver permitting an
employee to hold certain financial interests if Treasury determines that
holding such interests does not substantially interfere with the integrity of
the individual’s performance. 74 According to Treasury, to date, two waivers
have been issued to OFS employees. One of these waivers gave a new OFS
employee 90 days to divest assets held in pooled investment funds that
could have presented a conflict into nonconflicting assets. In the other
case, after determining that a senior OFS official’s deposits in a banking
institution could present a conflict of interest to the extent that these
deposits exceeded the FDIC-insured limit of $250,000, as a precautionary
measure, Treasury issued a waiver to permit the individual to retain these
deposit accounts. In both cases, Treasury determined that the investments
involved were not likely to affect the integrity of the individual’s federal
service.
In addition, when reviewing financial disclosure reports, Treasury ethics
counsel consulted with OFS employees on what activities they should
recuse themselves from participating in during their employment with OFS
because such activities could have potentially interfered with the
independent and objective performance of their jobs. According to
Treasury, during reviews of financial disclosure reports, OFS employees
have agreed to divest themselves of certain financial assets to mitigate
potential conflicts. Although Treasury does not routinely track
divestments, Treasury provided some documentation demonstrating that
multiple OFS employees divested assets that might have caused a conflict
with their official duties.
Treasury has appropriately identified potential conflicts of interests among
senior-level OFS officials and has taken appropriate steps to address such
issues. We reviewed 15 public financial disclosure reports submitted by
OFS officials as of April 23, 2009. Seven of the reports reviewed had
already been submitted to the detailees’ federal agencies during the past
fiscal year, but Treasury’s ethics counsel reviewed the reports again to
assess potential conflicts in the context of the employee’s OFS duties. In

74

18 U.S.C §208(b).

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our review of the reports, we identified financial interests that could have
conflicted with the independent and objective performance of some
duties. During our consultation with Treasury’s ethics counsel, however,
we found that the same interests had already been identified, and we
obtained information showing that the ethics counsel had taken the
appropriate steps to address them. For example, in some cases, Treasury’s
ethics counsel instructed individuals to divest themselves of certain
investments. In other cases, Treasury’s ethics counsel directed individuals
to recuse themselves from matters involving former employers or firms
that compensated them for consulting services.

Treasury Has Continued to
Engage Contractors and
Financial Agents

Since our March 2009 report, Treasury has awarded 11 new contracts and
entered into four new financial agency agreements, bringing to 40 the total
number of TARP financial agency agreements, 75 contracts, and blanket
purchase agreements as of June 1, 2009. 76 Of the 11 new contracts,

•

4 are in support of services related to the automotive industry,

•

2 are for legal services related to PPIP,

•

1 is for legal services related to small business loans and securities,

•

1 is to perform credit reform modeling analysis, and

•

3 are for OFS facilities services.
Of the 4 new financial agency agreements,

•

1 is for asset management services in support of the small business
assistance program, and

•

3 are for asset management services in support of CPP.

75

A financial agency agreement is a document that establishes and governs the relationship
between Treasury and its financial agent. A financial agent is a financial institution that has
authority to hold deposits of public money and perform related services. A financial agent
has a principal-agent relationship with Treasury and owes a fiduciary duty of loyalty and
fair dealing to the United States. See 31 C.F.R. pt. 202.

76

In addition, Treasury is utilizing contractor support for internal controls, information
technology, and financial advisory services through four interagency agreements.

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Since March 2009, Treasury used expedited procedures to award seven
contracts using other than full and open competition based on unusual and
compelling urgency. 77 Treasury also used the General Services
Administration’s Federal Supply Schedule in three instances. 78 In most
cases, Treasury solicited and received offers from multiple firms. While
competition requirements do not apply to Treasury’s authority to
designate financial agents, Treasury issued a general solicitation for asset
manager proposals in support of CPP and received more than 200
submissions, from which it made its current three selections. Treasury has
yet to decide on the extent to which it will need additional asset managers.
For detailed status information on new, ongoing, and completed Treasury
contracts and agreements as of June 1, 2009, see GAO-09-707SP. 79
Treasury encourages small businesses, including minority- and womenowned businesses, to pursue procurement opportunities on TARP
contracts and financial agency agreements. 80 OFS has considered potential
vendors’ efforts to utilize small businesses as part of its selection criteria
on most contracts and some financial agency agreements. As of June 1,
2009, Treasury has awarded nine of its 40 prime contracts or financial
agency agreements (23 percent) to small or minority- and women-owned
businesses. Two of the new prime contracts awarded since our March
2009 report were awarded to small businesses for credit reform analysis
and OFS facilities services, one was awarded to a small minority/womenowned business for legal support to PPIP, and two of the new financial
agency agreements are with minority- and women-owned businesses for
asset management services. To date, however, the majority of small or

77
This total does not include a recent contract with Phacil Inc., for which Treasury did not
provide information. The Competition in Contracting Act authorizes agencies to limit
competition when, for example, an unusual and compelling urgency precludes the use of
full and open competition. 41 U.S.C. § 253.
78

The total does not include a contract with Heery International Inc., for which Treasury
did not provide information. The Federal Supply Schedule program is managed by the
General Services Administration and provides federal agencies with a simplified process
for obtaining commercial supplies and services at prices associated with volume buying.

79

GAO-09-707SP.

80

For example, according to Treasury, it hosted an Industry Day and Small Business
Networking event on May 27, 2009, related to a planned omnibus acquisition for legal
services to present information, address questions, and provide a forum for small
businesses to pursue partner arrangements to enhance their capability to compete for the
acquisition. According to Treasury, approximately 40 interested firms attended the event,
and 11 small business firms presented their capabilities to the audience.

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minority- and women-owned businesses participating in TARP are
subcontractors with TARP prime contractors. According to OFS officials,
as of June 1, 2009, 30 of 42 TARP subcontractors (71 percent) represented
small or minority- and women-owned business categories, as shown in
table 12. 81
Table 12: TARP Contracts, Financial Agency Agreements, and Subcontracts with
Minority-Owned, Women-Owned, and Other Small Businesses, as of June 1, 2009
Prime contracts and
financial agency
a
agreements

Subcontracts

b

Total

4

9

13

2

11

13

Other Small

3

10

13

Total

9

30

39

Socioeconomic business
category
Minority-owned

c

Women-owned

Source: GAO analysis of Treasury data.
a

As of June 1, 2009, 40 TARP prime contracts and financial agency agreements have been issued.

b

As of June 1, 2009, prime contractors have awarded 42 TARP subcontracts, excluding 3
subcontractors for Fannie Mae.
c

Includes combination minority- and women-owned businesses.

As of June 1, 2009, legal services contracts and financial agency
agreements continue to account for the majority (67 percent) of services
used to directly support OFS’s administration of TARP, as shown in
figure 4. As of the same date, Treasury had expended $48,894,415 for
actions related to contracts and agreements—a $37 million increase in
contract and financial agency agreement expenses in the last 2 months
alone. The largest share of the total (38 percent) was for legal services,
and the second-largest share (24 percent) was for services provided by
financial agents.

81

The total of 42 subcontractors excludes three subcontractors for Fannie Mae.

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Figure 4: Number of and Expenses for OFS Contracts and Agreements, as of June 1, 2009
Number of contracts

Expenses

3%

1%

1

$203,606

2

6%
6%

$4,455,819

13%

2

38%
18%

21%

18%

6

7

24%

$6,330,987

6%

46%

$2,075,019
$8,563,420

$13,444,352

15
Human resource services
Investment/advisory services
Accounting/internal control services
Miscellaneous program support
Financial agency services
Legal services
Source: GAO analysis of Treasury data.

Note: These figures reflect 33 contracts, financial agency agreements, and interagency agreements
for services that have directly supported OFS’s administration of TARP, including 2 contracts that
expired as of June 1, 2009. This figure does not reflect contracts for, among other things, property
leases, a human resources advertisement, internal information technology services, and the purchase
of office equipment.

Since our March 2009 report, Treasury has increased its fiscal year 2009
budget estimate from $175 million to $263 million to cover higher
anticipated costs for OFS’s use of contractors and financial agents,
interagency agreement obligations, information technology services, office
rental, and other facilities costs. According to OFS budget officials, the
estimated $88 million budget increase is due primarily to financial agency

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agreement costs for Fannie Mae and Freddie Mac, the addition of new
TARP programs, and the realignment of some budget categories. 82
Treasury provides a basic descriptive listing of information on its
contracts and financial agency agreements through its TARP Web site and
its monthly report to Congress pursuant to section 105(a) of the act.
However, this reporting lacks the detail Congress and other interested
stakeholders need to track the progress of individual contracts and
agreements—such as a breakdown of obligations and/or expenses, in
dollars, by each entity. As OFS’s capacity to manage and monitor TARP
contracts and other agreements continues to grow, making this type of
information public on a regular basis would be useful, in addition to the
information Treasury already reports. 83
Some of the principal federal banking regulators involved in activities
related to TARP (Federal Reserve, FDIC, OCC, and OTS) currently use or
plan to use contractors in support of activities related to the program.
Officials reported that, as of June 1, 2009, the Federal Reserve was
contracting with four firms to provide support for AGP, including financial
evaluation and accounting services related to Federal Reserve loans made
to Citigroup and Bank of America. 84 In addition, FDIC plans to obtain
future contractor support to assist with activities related to PPIP’s Legacy
Loans Program. Though this program is still in development, FDIC
anticipates that contractor services in support of the program may include
financial advisory services, asset valuation, oversight and compliance
monitoring, title assignment, trustee services, and master servicer
responsibilities.

82

In February 2009, Treasury selected Fannie Mae to administer, maintain records for, and
serve as the paying agent for its homeowner assistance programs and Freddie Mac as the
compliance agent to oversee servicers’ home mortgage modifications.

83

To enhance the level of information provided to the public, we have provided through our
reports detailed status information on each new, ongoing, and completed TARP-related
financial agency agreement, contract, blanket purchase agreement, and interagency
agreement, including obligation and expense information, in dollars, provided to us by
Treasury.

84

The Federal Reserve’s contractors for the Asset Guarantee Program are Cleary Gottlieb
Steen & Hamilton, Pacific Management Investment Company (PIMCO), BlackRock, and
Ernst & Young.

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OFS Has Continued to Make
Progress in Managing and
Monitoring Conflicts of Interest
among Contractors and
Financial Agents

OFS continues to implement its system of compliance to manage and
monitor potential conflicts of interest that may arise with contractors and
financial agents seeking or performing work under TARP. 85 In response to
the January 2009 TARP conflicts-of-interest interim rule, 86 OFS received
nine comments before the public comment period ended March 23, 2009.
OFS anticipates that the process of developing a final rule on conflicts of
interest may take several months to complete.
We continue to track the actions OFS has taken to address two prior
recommendations: (1) to complete the review of, and as necessary
renegotiate, the four vendor conflicts-of-interest mitigation plans that
predated Treasury’s interim rule to enhance specificity and conformity
with the interim rule and (2) to issue guidance requiring that key
communications and decisions concerning potential or actual vendorrelated conflicts of interest be documented.
Since March, OFS has made progress toward completing the review, and
as necessary renegotiation, of four pre-existing vendor conflicts-of-interest
mitigation plans. In addition, Treasury extended the period of performance
for two existing legal services contracts in March 2009. Of these six
required reviews, two were completed as of May 2009, resulting in updated
contract language and revised mitigation plans. OFS anticipates
completing all remaining reviews and any necessary renegotiations by the
end of July 2009.
The two contracts OFS revised now include specific language mirroring
the interim rule and provide more details regarding required disclosures
and certifications. The revised language also added provisions such as

85

In addition to the contractors and financial agents performing work for OFS under TARP,
in December 2008 OFS established an interagency agreement with the Pension Benefit
Guaranty Corporation to obtain financial advisory services from Rothschild Inc. related to
the TARP-assisted domestic auto industry restructurings. Part of this agreement includes
Rothschild’s Conflicts of Interest Statement addressing OFS requirements for
nondisclosure of TARP information and identifying and preventing organizational and
personal conflicts of interest. While the statement addresses some of the same issues as the
TARP conflicts-of-interest interim rule, according to OFS, since Treasury does not directly
contract with Rothschild for financial advisory services, the interim rule does not apply. As
of May 31, 2009 Treasury’s obligations and expenses under this agreement were $7,770,000
and $4,303,000, respectively.
86

See 74 Fed. Reg. 3431-3436 (Jan. 21, 2009).

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•

requirements for conflicts-of-interest training for staff working under the
agreement,

•

prohibitions on offers of future employment or gifts to Treasury
employees, and

•

requirements that conflicts-of-interest rules apply to subcontractors and
consultants.
One of the two contracts was revised to include more specificity in the
conflicts-of-interest mitigation plan regarding steps to mitigate potential
organizational and personal conflicts, codes of ethics, and gift policies.
Based on our review, the revised requirements in these contracts match
those in new contracts that were awarded after the interim rule was
issued.
OFS concurred with, and has taken initial steps to implement, the second
recommendation that it issue guidance requiring that key communications
and decisions concerning vendor-related conflicts of interest be
documented, but it has yet to complete this task. OFS has drafted the
process flows for the formal inquiry process, illustrating how OFS tracks
and documents decisions concerning vendor-related conflicts of interest.
OFS plans to discuss implementation of this process at an internal training
of its contracting officer’s technical representatives and financial agent
relationship managers on June 23, 2009.

Indicators Generally
Suggest Positive
Developments in
Credit Markets, but
Isolating the Impact
of TARP Continues to
Present Challenges

While isolating and estimating the effect of TARP programs continues to
present a number of challenges, indicators of perceptions of risk in credit
markets generally suggest improvement since our March 2009 report,
although the cost of credit has risen in some markets. As we have noted in
prior reports, if TARP is having its intended effect, a number of
developments might be observed in credit and other markets over time,
such as reduced risk spreads, declining borrowing costs, and more lending
activity than there would have been in the absence of TARP. However, a
slow recovery does not necessarily mean that TARP is failing, because it is
not clear what would have happened without the programs. In particular,
several market factors helping to explain slow growth in lending include
weaknesses in securitization markets and the balance sheets of financial
intermediaries, a decline in the demand for credit, and the reduced
creditworthiness among borrowers. Nevertheless, credit market indicators
we have been monitoring suggest that while some rates have increased
since our March 2009 report, there has been broad improvement in

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interbank, mortgage, and corporate debt markets in terms of perceptions
of risk (as measured by premiums over Treasury securities). In addition,
empirical analysis of the interbank market, which showed signs of
significant stress in 2008, suggests that CPP and other programs outside
TARP that were announced in October of 2008 have resulted in a
statistically significant improvement in risk spreads even when other
important factors were considered. Although foreclosures continue to
highlight the challenges facing the U.S. economy, total mortgage
originations rose roughly 70 percent over the fourth quarter of 2008.
Similarly, while the Federal Reserve data show that lending standards
remain tight, our analysis of Treasury’s new loan survey indicate that the
largest 21 CPP recipients extended roughly $260 billion, on average, each
month in new loans to consumers and businesses in the first quarter of
2009.

TARP Programs Could
Have a Number of Effects
on Credit Markets and the
Economy

In our previous reports, we highlighted the rationale for CPP, CAP, TALF,
and the Home Affordability Mortgage Program (HAMP) and the intended
effects of these programs. Among other improvements, the TARP
programs, if effective, should jointly result in the following:
•

improvement in credit market conditions, including declining risk
premiums (the difference between risky and risk-free interest rates, such
as rates on U.S. Treasury securities) for interbank lending and bank debt
and lower borrowing costs for business and consumers.

•

improvement in banks’ balance sheets, enhancing lenders’ ability to
borrow, raise capital, and lend to creditworthy borrowers; however, as we
have discussed in previous reports, tension exists between promoting
lending and improving banks’ capital position.

•

fewer foreclosures and delinquencies than would otherwise occur in
absence of TARP.

•

improvements in asset-backed securities markets, a development that
should increase the availability of new credit to consumers and
businesses, lowering rates on credit card, automobile, small business,
student, and other types of loans traditionally facilitated by securitization.
While TARP’s activities could improve market confidence in participating
banks and have other beneficial effects on credit markets, we have also
noted in our previous reports that several factors will complicate efforts to
measure any impact. For example, any changes attributed to TARP may

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well be changes that (1) would have occurred anyway; (2) can be
attributed to other policy interventions, such as the actions of FDIC, the
Federal Reserve, or other financial regulators; or (3) have been enhanced
or counteracted by other market forces, such as the correction in housing
markets and revaluation of mortgage-related assets. Consideration of
market forces is particularly important when using bank lending as a
measure of CPP’s and CAP’s success because it is not clear what would
have happened in absence of TARP. Weaknesses in the balance sheets of
financial intermediaries, a decline in the demand for credit, reduced
creditworthiness among borrowers, and other market fundamentals
suggest lower lending activity relative to the expansion phase of the
business cycle. Similarly, nonbank financial institutions, which have
accounted for a significant portion of lending activity over the past two
decades, have been constrained due to weak securitization markets. 87
Because it is unlikely that any increase in loans originated by banks would
completely offset the decline in nonbank activity, the weakness in
securitization markets suggests that growth in aggregate lending will be
slow. Success in supporting nonbank financial institutions and revitalizing
the securitization market will depend in part on the success of TALF.
Lastly, because the extension of credit to less-than-creditworthy
borrowers appears to have been an important factor in the current
financial crisis, it is not clear that lending should return to precrisis levels.
As discussed in our March 2009 report, Treasury has introduced PPIP to
facilitate the purchase of legacy loans and securities. The program aims
not only to reduce uncertainty about the solvency of holders of these
assets but also to encourage price discovery in markets for these assets,
assuming current market prices are below what they would otherwise be
in a normally functioning market. The impact of PPIP will depend in
particular on the pricing of the purchased assets. Sufficiently high prices
will allow financial institutions to sell assets, deleverage, and improve
their capital adequacy. 88 To the extent that markets are underpricing such

87
Asset-backed security (ABS) issuance has become an important means by which financial
institutions fund loans to businesses and households. However, according to Security
Industry and Financial Markets Association estimates there has been very little activity in
private label mortgage backed-security (MBS) or ABS markets in general, outside of MBS
with government sponsorship.
88

Prices at or below what financial institutions are currently valuing these loans or
securities would provide limited incentive for them to sell. To the extent that nonrecourse
funding and FDIC-guaranteed debt provide an implicit subsidy (e.g., through offering
below-market loan terms) to potential buyers of legacy loans and securities, buyers would
likely be willing to pay higher prices for these assets.

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assets or prices are suppressed due to illiquidity, higher prices may be
more reflective of the underlying value or cash flows associated with the
assets (and therefore aid in price discovery). However, all other things
being equal, higher prices impose certain risks on Treasury, FDIC, and the
Federal Reserve if prices paid are too high, as these agencies will absorb
losses beyond the equity supplied by investors. The contribution of
private-sector equity capital reduces incentives to overpay for assets,
depending on the proportion of equity supplied, because greater equity
contributions entail greater downside risk for buyers. In addition to
providing more transparent pricing to these assets, PPIP, if it is effective,
should have effects broadly similar to the intended effects of CPP and
CAP: improved solvency at participating institutions, reduced uncertainty
about their balance sheets, and improved investor confidence, allowing
these institutions to borrow and lend at lower rates and raise additional
capital from the private sector.

Changes in Selected
Indicators Suggest General
Improvement in Credit
Market Conditions, but
These Changes Cannot Be
Attributed Exclusively to
TARP

We continue to consider a number of indicators that, although imperfect,
may be suggestive of TARP’s impact on credit and other markets.
Improvements in these measures would indicate improving conditions,
even though those changes may be influenced by general market forces
and cannot be exclusively linked to any one program or action being
undertaken to stabilize and improve the economy. Table 13 lists the
indicators we have reported on in previous reports, as well as the changes
since the March 2009 report and the changes since the announcement of
CPP, the first TARP program. In general, the indicators illustrate that the
cost of credit and perceptions of risk have declined in corporate debt,
mortgage, and interbank markets since mid-October 2008 although the
cost of credit has risen in some markets since our March 2009 report. For
example, the cost of interbank credit (LIBOR) has declined by 38 basis
points since our March 2009 report, and the TED spread, which captures
the risk perceived in interbank markets, has declined by 57 basis points.
Since the announcement of CPP, the LIBOR and TED spreads have fallen
by approximately 400 basis points. Since the announcement of CPP,
corporate bond spreads have declined, and there have been significant
decreases of 101 and 207 basis points for high-quality (Aaa) and moderatequality (Baa) corporate spreads, respectively, since our March 2009 report,
indicating reduced risk perceptions. 89 Although the Aaa bond market rate

89

A basis point is a common measure used in quoting yield on bills, notes, and bonds and
represents 1/100 of a percent of yield. An increase from 4.35 percent to 4.45 percent would
be an increase of 10 basis points.

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has increased somewhat since our March 2009 report, both Aaa and Baa
bond rates have declined since the announcement of CPP, indicating an
decrease in the cost of credit for businesses. Similarly, the improvement in
the mortgage market is consistent across rates and spreads although rates
have been rising dramatically recently. Mortgage rates were up 61 basis
points since our March 2009 report largely due to significant increases
over the last two weeks. However, the mortgage spread is down 53 basis
points. Since the announcement of CPP the improvement in the mortgage
market was consistent across rates and spreads—down 87 basis points
and 74 basis points, respectively. (See our December and January reports
for a more detailed description and motivation for the indicators.) 90 Recent
trends in these metrics are consistent with indicators monitored by GAO
but not reported and those tracked by other researchers. For example,
although not reported, the credit default swap index for the banking sector
has declined significantly since March 2009. 91 As discussed above, changes
in credit market conditions may not provide conclusive evidence of
TARP’s effectiveness, as other important policies, interventions, and
changes in underlying economic conditions can influence these markets.
Table 13: Select Credit Market Indicators, as of June 12, 2009
Credit market rates and spreads
Basis point change since Basis point change
GAO March 2009 report
since October 13, 2008

Indicator

Description

LIBOR

3-month London interbank offered
rate (an average of interest rates
offered in dollar-denominated loans)

Down 38

Down 388

TED spread

Spread between 3-month LIBOR
and 3-month Treasury yield

Down 57

Down 407

Aaa bond rate

Rate on highest quality corporate
bonds

Up 22

Down 62

Aaa bond spread

Spread between Aaa bond rate and
10-year Treasury yield

Down 101

Down 61

90

GAO-09-161 and GAO-09-296.

91

The credit default swap (CDS) index provides an indicator of the credit risk associated
with U.S. banks, as judged by the market. Therefore, declines in this index suggest lower
perceived risk in the U.S. banking sector. Thompson Datastream data show that the 5-year
CDS index dropped significantly after the initial passage of the act and again after the
announcement of CPP, before trending up again. However, from the end of March 2009 to
June 1, 2009, the bank CDS index fell by roughly 55 percent. Similarly, the Chicago Board
of Option Exchange VIX index, which measures expected stock market volatility, has fallen
considerably since late November 2008.

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Credit market rates and spreads
Basis point change since Basis point change
GAO March 2009 report
since October 13, 2008

Indicator

Description

Baa bond rate

Rate on corporate bonds subject to
moderate credit risk

Down 84

Down 108

Baa bond spread

Spread between Baa bond rate and
10-year Treasury yield

Down 207

Down 107

Mortgage rates

30-year conforming loans rate

Up 61

Mortgage spread

Spread between 30-year conforming Down 53
loans rate and 10-year Treasury
yield

Down 87
Down 74

Quarterly mortgage volume and defaults
Indicator

Description

Change from December 31, 2008 to March 31, 2009
(latest available date)

Mortgage originations

New mortgage loans

Up $185 billion to $445 billion

Foreclosure rate

Percentage of homes in foreclosure

Up .55 basis points to 3.85 percent

Sources: GAO analysis of data from Global Insight, Inside Mortgage Finance, and Thomson Datastream.

Note: Rates and yields are daily, except for mortgage rates, which are weekly. Higher spreads
(measured as premiums over Treasury securities of comparable maturity) represent higher perceived
risk in lending to certain borrowers. Higher rates represent increases in the cost of borrowing for
relevant borrowers. As a result “down” suggests improvement in market conditions for credit market
rates and spreads. Foreclosure rate and mortgage origination data are quarterly. See previous TARP
reports for a more detailed discussion (GAO-09-161 and GAO-09-296).

To examine further whether the decline in the TED spread could be
attributed in part to CPP, we conducted additional analysis using a simple
econometric model to address one of the most obvious threats to validity.
Because the TED spread reached extreme values leading up to the CPP
announcement (over 450 basis points), it is possible there would have
been declines from these peaks even in the absence of CPP simply
because extreme values have a tendency to return to normal levels. 92
However, even when we accounted for this possibility and the general
state of the economy using variables such as stock market performance
and the spread between long- and short-term Treasuries, we found that
CPP, announced on October 14, 2008, had a statistically significant

92

This phenomenon is often referred to as “regression to the mean” or “regression
artifacts.” Failure to acknowledge this phenomenon can lead to invalid inferences about a
program’s impact when analyzing time series data. We found that since 1982 the TED
spread exceeded 200 basis points only 3.2 percent of the time, underscoring the fact that
450 basis points is extreme and indicates the significant stress present in the interbank
market at the time of the CPP announcement.

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negative impact on changes in the TED spread. 93 Even so, the associated
improvement in the TED spread (or LIBOR) cannot be attributed solely to
TARP because the October 14 announcement was a joint announcement
that introduced other Federal Reserve and FDIC programs in addition to
CPP. Moreover, the model we used is relatively simple and did not attempt
to account for all of the important factors that might influence the TED
spread. Omitting such variables could bias the results in unpredictable
ways. (See appendix III for additional information and limitations.)
We continue to monitor mortgage originations and foreclosures as
potential measures of TARP’s effectiveness. As table 13 indicates,
mortgage originations increased over 70 percent, from $260 billion in the
fourth quarter of 2008 to $445 billion in the first quarter of 2009 (see also
fig. 5). We noted in previous reports that if TARP worked as intended, we
expected mortgage originations to stop declining and eventually rise. 94
While the volume of new mortgage lending may reflect the availability of
credit, it may also indicate changes in credit risk or the demand for credit.
As figure 5 illustrates, mortgage applications also increased in the first
quarter, principally due to refinancing. 95 Although originations were still
below the level in the first quarter of 2008, it is not clear that originations
would or should return to the level seen in the period leading up to the
credit market turmoil. Similarly, foreclosure data, although also influenced
by general market forces like falling housing prices and job loss, should
provide an indication of the effectiveness of HAMP and CPP to the extent
that improved market conditions enhance the ability of creditworthy

93

The model used changes in the TED spread as the dependent variable regressed on a CPP
indicator variable, a time trend, lagged values of changes in the S&P 500, the term spread
(structure), and the default risk premium—a dummy variable that denoted whether the
TED spread exceeded 200 basis points—as well as a counter variable that indicated the
number of consecutive days, including the day in question, that the TED spread became
extreme. However, the results were robust to a number of different econometric
specifications, including a two-stage approach that allowed us to generate the unexpected
value of the TED spread (as well as other spreads variables) by extracting the predictable
component from the variables using an autoregression model fit to each series. Like our
primary regressions modeling changes in the TED spread, the CPP indicator variable had a
statistically significant impact on the unexpected level of the TED spread, even when we
controlled for other potentially confounding factors.
94

It should also be noted that the increase in mortgage activity coincides with a drop in
mortgage rates associated with the Federal Reserve’s expanded program for the purchase
of agency MBS.

95

The mortgage application index is not seasonally adjusted here, to provide a more
appropriate comparison to the unadjusted mortgage origination data.

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borrowers to refinance mortgages. However, it is too soon to expect
material changes in this area given that HAMP was only recently
implemented. As table 13 shows, the percentage of loans in foreclosure
reached an unprecedented high of 3.9 percent at the end of the first
quarter of 2009, up from 3.3 percent the previous quarter. The foreclosure
rate on subprime loans rose to 14.3 percent from 13.7 percent (the rate for
adjustable-rate subprime loans is now over 23 percent). We will provide
additional information on foreclosures and general conditions in mortgage
markets in future TARP-related and other reports to Congress.
Figure 5: Mortgage Applications and Originations, First Quarter of 2004 through First Quarter of 2009
Mortgage originations (dollars in billions)
900

Mortgage applications index
900

800

800

700

700

600

600

500

500

400

400

300

300

200

200

100

100
0

0
Q1

Q2

Q3

2004

Q4

Q1

Q2

2005

Q3

Q4

Q1

Q2

Q3

2006

Q4

Q1

Q2

2007

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Year and quarter
Mortgage originations
Mortgage applications
Sources: Inside Mortgage Finance estimates and Global Insight.

New Lending at the 21 Largest
Participants in CPP

Our analysis of Treasury’s loan survey showed that the largest CPP
recipients continued to extend loans to consumers and businesses,
roughly $260 billion on average each month in 2009. Because these data
are unique, we were not able to benchmark the origination levels against
historical lending or seasonal patterns at these institutions. As illustrated

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in figure 6, new lending at the 21 largest institutions participating in CPP
fell 6 percent in February and rose 27 percent in March, month over
month. 96
Figure 6: Total New Lending at the 21 Largest Recipients of CPP, from October 1,
2008, through March 2009
Dollars in billions
300

250

200

150

100

50

0
October

November

December

January

2008

February

March

2009

Year and month
Source: GAO analysis of Treasury loan survey data.

Note: Lending levels may be affected by merger activity.

Although lending normally drops during a recession and lending standards
for consumer and business credit remained tight, our analysis of the April
2009 release of the Federal Reserve’s loan officer survey found that
aggregate new lending by these institutions in March amounted to roughly
$295 billion (see table 14), or 41 percent higher than the low recorded in

96
New lending includes new home equity lines of credit; mortgage, credit card, and other
consumer originations; new or renewed commercial and industrial loans, and commercial
real estate loans.

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November 2008. 97 Consistent with the trends in aggregate mortgage
originations discussed above, total mortgage originations for the largest
CPP banks rose 15 percent to roughly $117 billion. 98 The reporting
institutions generally received CPP funds on October 28, 2008, or
November 14, 2008, with a few institutions receiving funds on December
31, 2008, or January 9, 2009.
Table 14: New Lending at the 21 Largest CPP Recipients, First Quarter of 2009, by Institution
Dollars in millions
New lending
Institution

Date of CPP

Size of CPP

January

February

March

Citigroup, Inc.

10/28/2008

$25,000

$18,814

$14,692

$18,945

JPMorgan Chase

10/28/2008

25,000

46,785

39,543

65,445

Wells Fargo Bank

10/28/2008

25,000

50,560

56,051

64,810

Bank of America

10/28/2008

15,000

60,624

58,201

66,031

Goldman Sachs

10/28/2008

10,000

6,487

744

3,631

Morgan Stanley

10/28/2008

10,000

3,551

2,614

4,022

Bank of New York Mellon

10/28/2008

3,000

730

816

360

State Street

10/28/2008

2,000

289

1,170

1,457

U.S. Bancorp

11/14/2008

6,599

13,866

13,256

16,272

Capital One

11/14/2008

3,555

2,531

2,275

2,344

Regions

11/14/2008

3,500

4,983

4,867

5,800

SunTrust

11/14/2008

3,500

6,511

7,585

8,875

BB&T

11/14/2008

3,134

5,976

6,399

7,202

KeyCorp

11/14/2008

2,500

3,065

2,241

2,501

Comerica

11/14/2008

2,250

1,425

1,661

2,534

Marshall & Ilsley

11/14/2008

1,715

960

898

884

97

The Federal Reserve Senior Loan Officer survey asks senior loan officers at U.S. banks
about changes in lending standards, lending terms, and the state of business and household
demand for loans (see our March report for additional information or
http://www.federalreserve.gov/boarddocs/snloansurvey/). The most recent survey
conducted in April 2009 suggests that although the percentage of banks tightening credit
remains above previous peaks, the net percentage of respondents reporting having
tightened their credit standards in approving applications has continued to trend
downward from the October 2008 survey for most business and consumer loans.

98

This trend occurred even though the net percentage of banks that tightened lending
standards actually increased for prime and nontraditional mortgages from January to April
2009 according to Federal Reserve Senior Loan Officer Surveys.

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Dollars in millions
New lending
Institution

Date of CPP

Size of CPP

January

Northern Trust
PNC

11/14/2008

1,576

1,270

1,278

1,641

12/31/2008

7,579

8,170

7,991

9,851

FifthThird Bancorp

12/31/2008

3,408

5,070

5,467

7,082

CIT

12/31/2008

2,330

3,429

3,497

3,832

American Express

1/9/2009

3,389

889

845

1,303

$160,035

$245,984

$232,089

$294,822

Total

February

March

Source: GAO analysis of Treasury loan survey.

Note: The table features the 21 largest recipients of CPP funds that had received funds as of March
31, 2009. New lending includes new home equity lines of credit; mortgage, credit card, and other
consumer originations; new or renewed commercial and industrial loans; and commercial real estate
loans. However, new lending does not include other important activities that these institutions may
undertake to facilitate credit intermediation, including underwriting and purchasing MBS and ABS. In
addition, lending levels may be affected by merger activity. Date and size of CPP refers to the initial
infusion of CPP funds. Citigroup and Bank of America have received additional TARP funds.

Automobile Lending

As we discussed in the March report, TALF support to securitization
markets should, if effective, result in lower rates and increased availability
of credit for the businesses and households that receive the underlying
loans. The primary consumer ABS markets include ABS backed by auto
loans, credit card receivables, and student loans. Although TALF is in its
beginning stages, we have begun monitoring lending activity at the
institutions most likely to be impacted by conditions in securitization
markets. For example, because stand-alone auto finance companies are
more heavily reliant on securitization than commercial banks, we noted
that changes in the trends in their automobile loan rates could partially
reflect the issues in securitization markets that TALF is intended to
address. 99 As figure 7 shows, the average finance company auto rate has
been consistently below commercial bank auto rates. However, from
August to November 2008 the average finance company rate increased
significantly, rising by 132 basis points, while the average bank rate
increased just slightly (13 basis points). 100 In contrast, from November
2008 to February 2009, the finance company rate declined significantly

99

However, changes in these trends could also reflect the success of the CPP (or CAP) in
lowering or preventing a rise in bank auto rates. Note also that the bank rate reflects 48month loans, while the average maturity for the finance rate is between 59 and 67 months
over the time period surveyed.

100

Although not included in the figure because comparable data were not available for the
banks, the finance rate increased to 8.42 percent in December 2008.

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(326 basis points) to 3.2—well below the bank rate, which fell only 13
basis points. The average rate for new automobile loans at finance
companies declined another 43 basis points to 2.74 percent during
March. 101 While these declines correlate with the launching of TALF, the
finance rate could also reflect the attempt by auto finance companies to
attract buyers in a weak market, as well as other forces. We will continue
to monitor these trends as well as data on credit card debt and other
consumer and business loan markets. Moreover, because TALF has been
expanded to other assets, including commercial MBS, other measures of
lending activity and loan rates may become more appropriate indicators as
time progresses.
Figure 7: Average Finance Rate for New Cars at Auto Finance Companies and Banks, from February 1, 2006, through March
2009
Percent
8
7
6
5
4
3
2

1
0
Feb.

May

2006

Aug.

Nov.

Feb.

May

Aug.

Nov.

2007

Feb.
2008

Year and month

May

Aug.

Nov.

Feb. March
2009

Bank auto rate
Finance company auto rate
Source: GAO analysis of Federal Reserve data.

Note: Bank finance rate reflects 48-month loans, while the average maturity for the finance company
rate is between 59 and 67 months.

101

March data were unavailable for commercial bank auto rates for inclusion in this report.

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Conclusions

Treasury has continued to take steps to refine some TARP programs and
finalize others. In doing so, it has taken steps to address our previous
recommendations. Some areas, however, require ongoing attention. For
example, Treasury has hired the asset managers that will have a role in
monitoring compliance with the terms of CPP and other programs, but it is
continuing to develop a comprehensive oversight program for all TARP
program recipients. Consistent with our recommendation for greater
disclosure of monies paid to Treasury by TARP participants, Treasury now
includes dividends and interest received in its periodic reports to Congress
that are also posted to the www.financialstaility.gov Web site and plans to
provide dividend information by institution on the Web site. OFS has also
made progress in filling key positions in most areas but some vacancies
continue to be more challenging to fill. Finally, Treasury has made
additional progress in improving its communication strategy, including
hiring an individual who will be responsible for managing OFS’s
relationships with Congress, among other duties, but continued progress
in this area would further improve the transparency of the program.
Appendix II provides our assessment of Treasury’s implementation of our
previous recommendations.
Since our March 2009 report, Treasury has hired its first asset managers to
help manage its investment portfolio and help monitor compliance with
limitations on dividend payments and stock repurchases. However,
Treasury has yet to clearly identify the role that asset managers will have
in monitoring compliance; it has only noted that the asset managers will
have a limited role in the area of executive compensation oversight. While
hiring these managers is an important step, Treasury has yet to develop a
structured process to oversee compliance with program requirements and
the act. As noted in prior reports, we will continue to monitor
developments in this area, which is critical to ensuring the accountability
and integrity of the program.
The Federal Reserve’s completion of the stress tests for the 19 largest
bank holding companies was a significant milestone for CAP. While stress
test results revealed that about half of the banks needed to raise additional
capital to ensure their ability to continue lending to creditworthy
borrowers and maintain sufficient capital against losses, it remains unclear
whether any of the institutions will have to use CAP to raise additional
capital. The results of the stress test provided a rare glimpse into the
condition of these institutions, but questions have been raised about the
stress test assumptions, given the ongoing challenges in financial markets.
Moreover, the Federal Reserve does not plan to provide any additional
information on the condition of the banks over the next 18 months that

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could show whether the banks had met their projected performance and
loss levels. The extent to which the institutions will disclose additional
information is unclear. As a result, the information provided could be
selective and difficult to compare across institutions, raising questions not
only about transparency of SCAP but also CAP. Moreover, the Federal
Reserve did not provide OFS staff with information about SCAP prior to
its public release and has no plans to share ongoing information about any
of the SCAP institutions that continue to be CPP or CAP participants.
Without such information, OFS lacks information needed to adequately
monitor these programs.
Although several banks have repurchased or announced plans to
repurchase their preferred shares and warrants, the regulators’ repurchase
approval criteria have lacked adequate transparency. The Federal Reserve
has provided criteria for the 19 largest bank holding companies, but the
other regulators have not consistently provided details about how they
have made repurchase determinations and how they will make future
determinations. Clearly articulated and consistently applied criteria are
indicative of a robust decision-making process, and without them,
Treasury’s ability to help ensure consistent treatment of institutions
requesting repurchase of their shares is limited.
Similarly, Treasury has provided limited information about the warrant
repurchase process on its www.financialstability.gov Web site. We
recognize the challenges associated with valuing warrants in the absence
of readily available markets for these instruments. For this reason, and
because the valuation process can be assumption driven, a well-designed,
fully vetted transparent process becomes critical to defusing questions
about the warrant valuation process and whether the resulting prices paid
by the institutions reflect the taxpayers’ best interests. While Treasury has
provided some limited information about the valuation process, it has yet
to provide the level of transparency at the transaction level that would
begin to address such questions. Additional information, such as the
institution’s initial offer and Treasury’s final valuation, would begin to
address some of these issues.
Treasury has taken steps toward implementing a communication strategy,
such as developing a new Web site and developing a media relations
position dedicated to TARP. Treasury has also included its public affairs
and legislative affairs staff in regular meetings with OFS to ensure that
communication and operations are better integrated. However, Treasury’s
current communication strategy may not be as effective as it could be.
Treasury has recognized the importance of reaching out to congressional

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stakeholders on a regular and proactive basis and planned to do more to
ensure that all committees of jurisdiction receive regular communication
about TARP. However, until this strategy is fully implemented,
congressional stakeholders may not receive information in a consistent or
timely manner. In addition, although Treasury has said that the new
www.financialstability.gov Web site is a key component of its efforts to
improve communication on TARP, it has not yet taken steps to determine
whether the site is user-friendly or whether visitors to the site are finding
the information they seek. Usability testing and customer satisfaction
surveys are recognized best practices for improving the usefulness of Web
sites. While Treasury is in the process of exploring the use of such tools,
these efforts should be implemented as quickly as possible to gauge the
effectiveness of its communication efforts.
Treasury has continued to make progress in establishing its management
infrastructure and has responded to our two most recent contracting
recommendations and continued to respond to the others.
•

In the hiring area, Treasury has continued to establish its management
infrastructure, including hiring more staff. In accordance with our prior
recommendation that it expeditiously hire personnel to OFS, Treasury
continued to use direct-hire and various other appointments to bring a
number of career staff on board quickly. Since our March 2009 report,
Treasury has continued to increase the total number of OFS staff overall,
including the number of permanent staff. However, continued attention to
hiring remains important because some offices within OFS, such as the
offices of Homeownership and Risk and Compliance, continue to have a
number of vacancies that need to be filled as TARP programs become fully
implemented.

•

In the internal controls area, consistent with our previous report
recommendation that Treasury update guidance available to the public on
determining warrant exercise prices to be consistent with actual practices
applied by OFS, Treasury updated its frequently asked questions on its
Web site to clarify the process it follows for determining the prices.
However, there continues to be inconsistent guidance available on the
Web site for calculating the exercise prices. Treasury told us that any new
CPP applicants would most likely be non-public institutions for which
these guidance documents would not apply. As such, Treasury does not
believe the inconsistent guidance is a significant issue and therefore does
not plan on further addressing the inconsistency. If this warrant exercise
price guidance is no longer needed, then we believe that Treasury should
remove these guidance documents from its Web site to alleviate any
inconsistent descriptions of its process pertaining to warrant exercise

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price calculations for public institutions. If Treasury chooses to leave the
documents on its Web site, then, as we previously recommended, Treasury
should make these documents consistent with respect to the warrant
exercise price calculations.
•

Treasury has continued to build a network of contractors and financial
agents to support TARP administration and operations and has an
opportunity to enhance transparency through its existing reporting
mechanisms. Treasury issues a number of reports and uses other
mechanisms, such as public announcements and its Web site, to provide
information to the public. Useful details are still lacking, however, on the
costs of procurement contracts and financial agency agreements, such as a
breakdown obligated and expenses for each entity. These contracts and
agreements are key tools OFS has used to help develop and administer its
TARP programs. By not providing this information, Treasury is missing an
opportunity to provide additional transparency about the cost of TARP
operations.
Finally, while again noting the difficulty of measuring the effect of TARP’s
activities, some indicators suggest general improvements in various
markets since our March 2009 report although the cost of credit has risen
in some cases. Specifically, the Baa corporate bond rate and LIBOR have
declined but mortgage and Aaa bond rates have risen. However,
perceptions of risk in credit markets (as measured by premiums over
Treasury securities) have decreased in interbank, mortgage, and corporate
bond markets, while total mortgage originations have increased. Empirical
analysis of the interbank market, which showed signs of significant stress
in 2008, suggests that CPP and other programs outside of TARP that were
announced in October 2008 resulted in a statistically significant
improvement in risk spreads, even when other important factors were
considered. In addition, although Federal Reserve survey data suggest that
lending standards remained tight, collectively the largest CPP recipients
extended roughly $260 billion on average each month in new loans to
consumers and businesses in the first quarter of 2009, according to the
Treasury’s loan survey. However, attributing any of these changes directly
to TARP continues to be problematic because of the range of actions that
have been and are being taken to address the current crisis. While these
indicators may be suggestive of TARP’s ongoing impact, no single
indicator or set of indicators can provide a definitive determination of the
program’s impact.

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Recommendations for
Executive Action

While the Department of the Treasury has taken actions to address our
previous recommendations, we continue to identify areas that warrant
ongoing attention and focus. Therefore, we recommend that Treasury take
the following five actions as it continues to improve TARP and make it
more accountable and transparent:

•

Ensure that the warrant valuation process maximizes benefits to taxpayers
and consider publicly disclosing additional details regarding the warrant
repurchase process, such as the initial price offered by the issuing entity
and Treasury’s independent valuations, to demonstrate Treasury’s
attempts to maximize the benefit received for the warrants on behalf of
the taxpayer.

•

In consultation with the Chairmen of the Federal Deposit Insurance
Corporation and the Federal Reserve, the Comptroller of the Currency,
and the Acting Director of the Office of Thrift Supervision, ensure
consideration of generally consistent criteria by the primary federal
regulators when considering repurchase decisions under TARP.

•

Fully implement a communication strategy that ensures that all key
congressional stakeholders are adequately informed and kept up to date
about TARP.

•

Expedite efforts to conduct usability testing to measure the quality of
users’ experiences with the financial stability Web site and measure
customer satisfaction with the site, using appropriate tools such as online
surveys, focus groups, and e-mail feedback forms.

•

Explore options for providing to the public more detailed information on
the costs of TARP contracts and agreements, such as a dollar breakdown
of obligations and/or expenses.
Finally, to help improve the transparency of CAP—in particular the stress
tests results—we recommend that the Director of Supervision and
Regulation of the Federal Reserve consider periodically disclosing to the
public the aggregate performance of the 19 bank holding companies
against the more adverse scenario forecast numbers for the duration of the
2-year forecast period and whether or not the scenario needs to be revised.
At a minimum, the Federal Reserve should provide the aggregate
performance data to OFS program staff for any of the 19 institutions
participating in CAP or CPP.

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Agency Comments
and Our Evaluation

We provided a draft of this report to Treasury for review and comment. We
also provided excerpts of the draft to the FDIC, Federal Reserve, OCC, and
OTS. We received written comments from Treasury that are reprinted in
Appendix I. The Federal Reserve provided oral comments, which we
discuss later. We also received technical comments from Treasury, the
Federal Reserve, and FDIC that we incorporated, as appropriate.
In its written comments, Treasury described steps it had taken in the last
60 days to address the extraordinary economic challenges, including the
Treasury financed restructurings of GM and Chrysler among others.
Treasury also noted the progress it has made in addressing our previous
recommendations. It also noted that the recommendations in this report
were constructive as it implements its programs and enhances OFS’s
performance. Moreover, they said several initiatives underway are
consistent with our recommendations. According to Treasury, among
other things, it is in the process of expanding its public disclosure about
the warrant repurchase process, implementing a communication strategy
that will provide all key congressional stakeholders more current
information about TARP, and planning a usability test to measure
satisfaction with its new Web site. We will continue to monitor Treasury’s
progress in implementing these and other planned initiatives in future
reports.
On June 12 and 15, 2009, we received oral comments from the Senior
Advisor to the Director of the Division of Banking Supervision and
Regulation on excerpts of the draft pertaining to the Federal Reserve. The
official expressed concern that our recommendation to consider
periodically disclosing aggregate information to the public on the
performance of the 19 U.S. bank holding companies against the more
adverse scenario would be operationally difficult and potentially
misleading. Specifically, the official said the SCAP loss estimates were
developed as aggregate 2-year estimates, without attempting to forecast
the quarter-to-quarter path of such losses over the 2009 to 2010 period.
Further, the official expressed concern that the size and character of the
bank holding companies’ on- and off-balance sheet exposures may change
materially over the 2-year period and that the Federal Reserve never
intended that the one-time SCAP estimates be used as a tool for measuring
U.S. bank holding company performance during the 2009 to 2010 period.
We understand that while this analysis would pose some operational
challenges for the Federal Reserve because the exercise was intended to
calculate a one-time capital buffer needed to withstand a more adverse
economic scenario and that the on-and off-balance sheet exposure of the

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19 institutions may change materially over time. However, given the
dynamic economic environment, we see great value in periodically
measuring and reporting U.S. bank holding company performance against
the adverse scenario and whether the adverse scenario is more or less
adverse compared against changing economic conditions. Although this
would periodically require additional calculations, we believe this analysis
would provide useful trend information on the aggregate health of these
important institutions. As we previously stated, without such analysis, the
public will not have reliable information that can be used to gauge the
accuracy of the stress test projections on a more detailed basis than what
has been disclosed in the SCAP papers. Further, it could counter any
adverse affect of any selective reporting by individual institutions. Finally,
such periodic reporting would be useful in the measurement of the
effectiveness of SCAP and CAP.

We are sending copies of this report to the Congressional Oversight Panel,
Financial Stability Oversight Board, Special Inspector General for TARP,
interested congressional committees and members, Treasury, the federal
banking regulators, and others. The report also is available at no charge on
the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact
Richard J. Hillman at (202) 512-8678 or hillmanr@gao.gov, Thomas J.
McCool at (202) 512-2642 or mccoolt@gao.gov, or Orice Williams Brown at
(202) 512-8678 or williamso@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix VI.

Gene L. Dodaro
Acting Comptroller General
of the United States

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List of Committees
The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable Christopher J. Dodd
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Kent Conrad
Chairman
The Honorable Judd Gregg
Ranking Member
Committee on the Budget
United States Senate
The Honorable Max Baucus
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate
The Honorable David R. Obey
Chairman
The Honorable Jerry Lewis
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable John M. Spratt, Jr.
Chairman
The Honorable Paul Ryan
Ranking Member
Committee on the Budget
House of Representatives

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The Honorable Barney Frank
Chairman
The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Charles B. Rangel
Chairman
The Honorable Dave Camp
Ranking Member
Committee on Ways and Means
House of Representatives

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Appendix I: Comments from the Department
of the Treasury

Appendix I: Comments from the Department
of the Treasury

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Appendix I: Comments from the Department
of the Treasury

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Appendix II: Status of Prior GAO
Recommendations

Appendix II: Status of Prior GAO
Recommendations

GAO recommendations

Status

December 2, 2008, report
Work with the bank regulators to establish a systematic means of monitoring and reporting whether financial Implemented
institutions’ activities are generally consistent with the purposes of CPP and help ensure an appropriate
level of accountability and transparency.
Develop a means to ensure that institutions participating in CPP comply with key program requirements (for
example, executive compensation, dividend payments, and the repurchase of stock).

Partially implemented

Formalize the existing communication strategy to ensure that external stakeholders, including Congress, are Partially implemented
informed about the program’s current strategy and activities and understand the rationale for changes in this
strategy to avoid information gaps and surprises.
Facilitate a smooth transition to the new administration by building on and formalizing ongoing activities,
including ensuring that key Office of Financial Stability (OFS) leadership positions are filled during and after
the transition.

Implemented

Expedite OFS’s hiring efforts to ensure that Treasury has the personnel needed to carry out and oversee
Troubled Asset Relief Program (TARP).

Partially implemented

Ensure that sufficient personnel are assigned and properly trained to oversee the performance of all
contractors, especially for contracts priced on a time-and-materials basis, and move toward fixed-price
arrangements, whenever possible.

Implemented

Continue to develop a comprehensive system of internal control over TARP, including policies, procedures,
and guidance that are robust enough to protect taxpayers’ interests and ensure that the program objectives
are being met.

Partially implemented

Issue final regulations on conflicts of interest involving Treasury’s financial agents, contractors, and their
employees and related entities as expeditiously as possible, and review and renegotiate vendor mitigation
plans, as necessary, to enhance specificity and compliance with the new regulations once they are issued.

Partially implemented

Institute a system to effectively manage and monitor the mitigation of vendor-related conflicts of interest.

Implemented

January 30, 2009 report
Expand the scope of planned monthly CPP surveys to include collecting at least some information from all
institutions participating in the program.

Implemented

Ensure that future CPP agreements include a mechanism that will better enable Treasury to track the use of Partially implemented
the capital infusions and seek to obtain similar information from existing CPP participants.
Establish a process to ensure compliance with all CPP requirements, including those associated with
limitations on dividends and stock repurchase restrictions.

Partially implemented

Communicate a clearly articulated vision for TARP and how all individual programs are intended to work in
Partially implemented
concert to achieve that vision. This vision should incorporate actions to preserve homeownership. Once this
vision is clearly articulated, Treasury should document needed skills and competencies.
Continue to expeditiously hire personnel needed to carry out and oversee TARP.

Partially implemented

Expedite efforts to ensure that sufficient personnel are assigned and properly trained to oversee the
performance of all contractors, especially for contracts priced on a time-and-materials basis, and move
toward fixed-price arrangements whenever possible as program requirements are better defined over time.

Implemented

Develop a comprehensive system of internal control over TARP activities, including policies, procedures,
and guidance that are robust enough to ensure that the program’s objectives and requirements are met.

Partially implemented

Develop and implement a well-defined and disciplined risk-assessment process, as such a process is
essential to monitoring program status and identifying any risks of potential inadequate funding of
announced programs.

Partially implemented

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Appendix II: Status of Prior GAO
Recommendations

GAO recommendations

Status

Review and renegotiate existing vendor conflict-of-interest mitigation plans, as necessary, to enhance
specificity and conformity with the new interim conflicts-of-interest regulation, and take continued steps to
manage and monitor conflicts of interest and enforce mitigation plans.

Partially implemented

March 31, 2009 report:
Develop a communication strategy that includes building an understanding and support for the various
components of the program. Specific actions could include hiring a communications officer, integrating
communications into TARP operations, scheduling regular and ongoing contact with congressional
committees and members, holding town hall meetings with the public across the country, establishing a
counsel of advisers, and leveraging available technology.

Partially implemented

Require that AIG seek concessions from stakeholders, such as management, employees, and
counterparties, including seeking to renegotiate existing contracts, as appropriate, as it finalizes the
agreement for additional assistance.

Closed, not
implemented

Update OFS documentation of certain internal control procedures and the guidance available to the public
on determining warrant exercise prices, to be consistent with actual practices applied by OFS.

Partially implemented

Improve transparency pertaining to TARP program activities by reporting publicly the monies, such as
dividends, paid to Treasury by TARP participants.

Implemented

Complete the review of, and as necessary renegotiate, the four existing vendor conflicts-of-interest
mitigation plans to enhance specificity and conformity with the new interim conflicts-of-interest rule.

Partially implemented

Issue guidance requiring that key communications and decisions concerning potential or actual vendorrelated conflicts of interest be documented.

Partially implemented

Source: GAO.

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Appendix III: Econometric Analysis of TED
Spread

Appendix III: Econometric Analysis of TED
Spread
We conducted an econometric analysis to assess the impact of Capital
Purchase Program (CPP) on the TED spread. Our multivariate
econometric model uses a standard interrupted time series design using
daily data on the TED spread. In lieu of relying on graphing and identifying
trends in the data before and after the announcement, the goal of this
exercise was to determine whether the large decline in the TED spread
could be associated with CPP in a statistically significant way when other
important variables were also considered, including a time trend and a
variable thought to control for the tendency of extreme values to revert to
more normal levels. To carry out the exercise as validly as possible, we
conducted tests to ensure the stationarity of the variables in the model,
used heteroskedasticity and autocorrelation-consistent (HAC) standard
errors and conducted sensitivity analysis. 1
The primary regressions model changes in the TED spread as a function of
lagged values of changes in the term structure (spread between short- and
long-term bonds), default spread (spread between lower quality and higher
quality bonds), target federal funds rate, and the S&P 500, as well as a
variable that indicates whether CPP was in place (starting with the
announcement date). We also include a time trend, an indicator variable
that indicates whether the TED spread was at an extreme value the day
before (defined as 200 basis points or greater) and a counter variable that
indicated the number of consecutive days, including the day in question,
that the TED spread had taken on an extreme value. The latter variable
was included to control for a potential “regression to the mean” effect. As
a robustness check, we also ran a variation of the model using a two-step
procedure where we (1) extract the predictable component from the TED
spread, term structure and default risk premium and (2) use the
unpredicted spreads in the regression. We also ran the model on various
time periods. In all cases, we found CPP to have a statistically significant
impact on the TED spread. However, it should be noted that we did not
attempt to capture all potential factors that might explain movements in
the TED spread, and, therefore, omitted variable bias remains a concern.
Moreover, since other programs were put in place from October 2008 to

1

It has been shown that carrying out an HAC adjustment in an event study context with
dichotomous event variables (pulse dummies) can result in inconsistent standard errors
and spurious findings under certain conditions. For example, see T. Fromby and J. Murfin,
“Inconsistency of HAC Standard Errors in Event Studies with i.i.d. errors,” Applied
Financial Letters, vol. 1 (2005). Our results were not sensitive to this adjustment; however,
the correction did result in smaller standard errors and larger t-statistics for the CPP
variable.

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Appendix III: Econometric Analysis of TED
Spread

February 2009, further analysis that attempts to control for these
interventions would provide more definitive results.

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Appendix IV: Overview of Treasury’s CPP
Repurchase Process

Appendix IV: Overview of Treasury’s CPP
Repurchase Process
As participants have started to repay their assistance as permitted by the
Emergency Economic Stabilization Act of 2008 (the act), as amended by
the American Recovery and Reinvestment Act of 2009, the Department of
the Treasury (Treasury) has developed standard processes for each type of
security. The following provides an overview of the repurchase process for
preferred shares and subordinated debt and warrants.

Preferred Stock and
Subordinated Debt
Repurchase Process

In a repurchase, the financial institution buys back preferred stock or
subordinated debt from Treasury that was issued under Treasury’s Capital
Purchase Program (CPP) to stabilize the financial system. Under the
original terms of CPP, financial institutions were prohibited from
repurchasing such stock and debt within the first 3 years unless they
completed a qualified equity offering. 1 Under the act, as amended,
Treasury must permit a financial institution to repurchase the preferred
stock or subordinated debt issued to Treasury at any time, subject to
Treasury’s consultation with the primary federal banking regulator. In
Treasury’s public guidance (FAQs) on repurchases, it states that financial
institutions should give notice of their intent to repurchase to their
primary banking regulator, which will apply existing supervisory
procedures to determine whether to approve the repurchase.
As shown in figure 8, the process begins when Treasury and the primary
federal regulator receive written notification (e-mail or letter) from the
financial institution of its intent to repurchase in full or in part its
preferred stock or other securities from Treasury. The primary federal
regulator performs an analysis using available supervisory information and
information provided by the institution to gauge its current financial
condition and prospects, such as whether there has been a significant
change in a financial institution’s financial condition and viability since it
received CPP funds. This analysis allows the regulator to determine if the
repurchase request should be approved or denied. In addition, the 19
largest U.S. bank holding companies that were subject to the stress test
must also be able to demonstrate access to common equity through public
issuance in the equity capital markets, and successfully issue senior
unsecured debt for a term greater than 5 years and not backed by Federal
Deposit Insurance Corporation (FDIC) guarantees, in amounts sufficient
to demonstrate a capacity to meet funding needs independent of FDIC

1

A qualified equity offering is the sale and issuance of Tier 1 qualifying perpetual preferred
stock, common stock, or a combination of such stock for cash.

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Appendix IV: Overview of Treasury’s CPP
Repurchase Process

guarantees. According to Treasury, the consultation consists of the
primary federal regulator informing Treasury of its decision to approve or
deny the request via e-mail. If the federal regulator of the entity that issued
the preferred stock or other securities to the Treasury indicates it has no
objection to, or approves of, the repurchase, Treasury then notifies in
writing the financial institution that the repurchase is in process and
instructs the financial institution to contact its Treasury counsel to set up
dates for closing and settlement. If the repurchase is denied, Treasury
notifies the institution.
Figure 8: Treasury’s Repurchase Process

FI
preferred stock
FI
or subordinated
warrants
debt

A

Financial
institution
(FI)

Treasury

C

Notice of
repurchase
of preferred
stock or
subordinated
debt

FI

Federal
regulator

FI
warrants

Treasury notifies institution
that the repurchase is in
process and instructs institution
to contact Treasury counsel
to set up dates for closing
and settlement.
Yes
Does
institution
want to
repurchase
warrants?
B
Regulator analyzes
financial condition and
viability of institution since
CPP funds were received.a
Approval or denial of request
is e-mailed to Treasury.

tice

No

No

Treasury

E Treasury and institution
calculate fair market
value (FMV) of warrants.
They have 10 days to
agree on FMV. If they
agree, the
warrants
Treasury
are sold; if
FMV they disagree, they
FMV
have 20
FI
days to
invoke the
appraisal
process.

Treasury may liquidate registered warrants.

D After repurchasing all preferred stock,
the institution has 15 days to notify
Treasury of the intent to repurchase
warrants originally issued with the
preferred stock.

Sources: GAO; Art Explosion.
a

The 19 largest bank holding companies must also demonstrate their financial strength by issuing
senior unsecured debt for a term greater than 5 years not backed by FDIC guarantees, in amounts
sufficient to demonstrate a capacity to meet funding needs independent of FDIC guarantees.

All four primary federal regulators noted that their role in the repurchase
process followed existing regulations and procedures for evaluating
requests by any financial institution regardless of whether they participate
in CPP. The Federal Reserve has established instructions for processing
capital repurchase requests for CPP and other government capital

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Appendix IV: Overview of Treasury’s CPP
Repurchase Process

programs by bank holding companies. 2 For the 19 U.S. bank holding
companies that participated in the Supervisory Capital Assessment
Program, on June 1, 2009, the Federal Reserve released the criteria it
planned to use to evaluate applications to repurchase Treasury’s capital
investments. The Federal Reserve in consultation with the U.S. bank
holding companies’ primary bank regulator and FDIC informed Treasury
on June 9, 2009, that it had no objection to the repurchase of preferred
shares by 9 of the SCAP bank holding companies. Also on June 9, 2009,
Treasury announced that these 9 U.S. bank holding companies, and one
other large institution, met the requirements for repayment and would be
eligible to repay about $68 billion to Treasury. An Office of Financial
Stability official noted that Treasury plays a limited role in this
determination process.

Warrant Repurchase
Process

If a financial institution repurchases all of its senior preferred shares, it
can repurchase some or all of its other equity securities held by Treasury.
The treatment of warrants differs in the standard securities purchase
agreements, depending on whether the firm that issues the warrants is
privately held or publicly traded. For privately held institutions, Treasury
immediately exercises the warrants at the time of the capital investment
and receives additional preferred shares. The financial institution
repurchases these warrant preferred shares after it repurchases the senior
preferred shares from Treasury. Publicly traded institutions have the
option to repurchase outstanding and unexercised warrants after the
senior preferred shares are repurchased. Although Treasury can sell the
warrants at any time, Treasury is required to notify the financial institution
30 days prior to a sale. Following a repurchase of the senior preferred
shares held by Treasury, an institution can repurchase the warrants at fair
market value (FMV), as defined in section 4.9 of the Securities Purchase
Agreement. If the financial institution chooses not to repurchase the
warrants, Treasury may liquidate the registered warrants.

2

Federal Reserve’s supervisory letter SR 09-4, dated February 24, 2009, and revised March
27, 2009, Applying Supervisory Guidance and Regulations on the Payment of Dividends,
Stock Redemptions, and Stock Repurchases at Bank Holding Companies and related
frequently asked questions. According to the letter, the revision is intended to provide
greater clarity on the priority of dividend payments on Tier 1 capital instruments and the
repurchase of capital instruments issued by bank holding companies under government
investment programs (such as CPP).

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Appendix IV: Overview of Treasury’s CPP
Repurchase Process

According to the Securities Purchase Agreement, financial institutions
have 15 days from the date of a repurchase of preferred stock to give
notice to Treasury of the intent to repurchase the warrants that were
originally issued with the stock. If the financial institution does not wish to
repurchase the outstanding warrants, Treasury may proceed with
liquidating the warrants at the current market price. If the financial
institution decides to repurchase the warrants, the institution’s board of
directors determines the FMV, acting in good faith and relying on an
opinion of a nationally recognized independent investment banking firm
retained by the financial institution for such purpose and certified in a
resolution to Treasury. Through the use of market quotes from market
participants, financial modeling, fundamental research, and a third-party
consultation, Treasury makes an independent determination of the FMV of
the warrants. If Treasury does not agree with the financial institution’s
determination, it may object in writing within 10 days of receipt of the
financial institution’s FMV determination, and the two parties must work
together to resolve any issues and agree on an FMV. If they are unable to
agree on an FMV in 10 days, either party has 20 more days to invoke the
appraisal procedure by delivery of written notice.
Under the appraisal procedure, Treasury and the financial institution each
choose an independent appraiser to determine the estimated FMV and
notify each other of their choices within 10 days. If the two appraisers are
unable to agree upon an FMV for the warrants within 30 days of their
appointment, the appraisers have 10 additional days to select and appoint
a third independent appraiser. The third appraiser then has 30 days to
render its estimated FMV. The three estimated FMVs are to be averaged
unless the larger of the differences between the higher FMV and middle
valuations and the middle and lower valuations is more than 200 percent
of the smaller difference. If the larger difference exceeds 200 percent of
the smaller, the outlying valuation that triggers the exception is to be
excluded and the remaining two are to be averaged. 3 The average will
become the binding FMV for Treasury and the financial institution; the
financial institution will be responsible for paying the costs of the
appraisal procedure.

3

For example, if the FMVs are $75 million, $50 million, and $40 million, the $75 million FMV
would be excluded because the difference between $75 million and $50 million ($25
million) is more than 200 percent of the difference between $50 million and $40 million
($10 million).

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Appendix V: Synopsis of Citigroup’s Financial
Condition

Appendix V: Synopsis of Citigroup’s Financial
Condition
Citigroup, Inc. (Citigroup) is one of the few institutions that has
participated in multiple Troubled Asset Relief Program (TARP) programs.
As of June 12, 2009, it is participating in the Capital Purchase Program
(CPP), the Targeted Investment Program (TIP), and the Asset Guarantee
Program (AGP). Its participation in multiple programs has raised a number
of questions about Citigroup’s financial condition. To analyze Citigroup’s
financial condition, we compared Citigroup with three similar institutions
that also received initial TARP funds through CPP in October 2008: Bank
of America Corporation, JPMorgan Chase, and Wells Fargo Company. 1 As
of March 31, 2009, these four institutions were the largest U.S. bank
holding companies.
This appendix compares selected data on Citigroup’s financial condition
from 2007 through the first quarter 2009 with that of the other three bank
holding companies. 2 Regarding net income, during all four quarters of
2008, Citigroup recorded growing losses, while the other three bank
holding companies continued to record profits. By the fourth quarter of
2008, Citigroup’s quarterly loss had increased to $27 billion (see fig. 9).

1

Four additional financial institutions received initial TARP funds: The Bank of New York
Mellon, the Goldman Sachs Group, Inc., Morgan Stanley, and State Street Corporation.
2

Net income is the amount of income after applicable taxes, minority interest,
extraordinary items, and adjustments.

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Appendix V: Synopsis of Citigroup’s Financial
Condition

Figure 9: Net Income (Loss) of the Four Largest U.S. Bank Holding Companies, First
Quarter of 2007 through First Quarter of 2009
Dollars in billions
20
15
10
5
0
-5
-10
-15
-20
-25
-30
Q1
Q2
2007
Year and quarter

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Bank of America
Wells Fargo and Company
JPMorgan Chase and Company
Citigroup
Source: GAO analysis of data from Consolidated Financial Statements for Bank Holding Companies, FR Y-9C from First Quarter 2007
through First Quarter 2009, Board of Governors of the Federal Reserve System.

Since the beginning of 2007, all four of the bank holding companies
experienced a decline in the market value of their equity as a percentage
of their total assets (see fig. 10). 3 However, since the beginning of 2008,
Citigroup’s ratio has been the lowest of the four.

3
Market value equity is the share price multiplied by the number of ordinary shares in an
issue. The amount in issue is updated whenever new tranches of stock are issued or after a
capital change.

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Appendix V: Synopsis of Citigroup’s Financial
Condition

Figure 10: Market Value of Equity (Common) as Percentage of Total Assets of the
Four Largest U.S. Bank Holding Companies, First Quarter of 2007 through First
Quarter of 2009
Percentage
25

20

15

10

5

0
Q1
Q2
2007
Year and quarter

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Bank of America
Wells Fargo and Company
JPMorgan Chase and Company
Citigroup
Source: GAO analysis of Thomson Datastream data.

We also reviewed the four bank holding companies’ debt-to-equity ratios
for the same period. 4 We calculated the debt-to-equity ratio as the holding
company liabilities or debt divided by the equity shareholder funds. A
higher ratio generally indicates a higher amount of financing with debt.
Citigroup’s debt-to-equity ratio was significantly higher than the other
three holding companies’ ratios, as shown in figure 11. From the fourth
quarter 2008 through the first quarter 2009, Citigroup’s ratio increased
slightly from 9.4:1 to about 9.5:1.

4

Equity (common) represents common shareholders’ investment in a company.

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Appendix V: Synopsis of Citigroup’s Financial
Condition

Figure 11: The Ratio of Debt to Equity of the Four Largest U.S. Bank Holding
Companies, First Quarter of 2007 through First Quarter of 2009
Debt-to-equity ratio
10

8

6

4

2

0
Q1
Q2
2007
Year and quarter

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Bank of America
Wells Fargo and Company
JPMorgan Chase and Company
Citigroup
Source: GAO analysis of Thomson Datastream data.

One indicator of capital adequacy is the tier 1 risk-based capital ratio. 5
Using this measure, before TARP funding, Citigroup’s tier 1 capital ratio
was similar to that of the three other large bank holding companies (see
fig. 12). In the third quarter of 2008, the capital ratios of the four bank
holding companies ranged from 8.9 percent to 7.6 percent, with Citigroup
reporting a tier 1 risk-based capital ratio of 8.2 percent.

5

Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of
view. It is considered the most stable and readily available capital for supporting a bank’s
operations. The preferred shares purchased by Treasury under TARP counted as tier 1
capital.

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Appendix V: Synopsis of Citigroup’s Financial
Condition

Figure 12: Tier 1 Risk-Based Capital Ratio of the Four Largest U.S. Bank Holding Companies, First Quarter of 2007 through
First Quarter of 2009
Ratio
12

10

8

6

4

2

0
Q1

Q2

Q3

Q4

2007

Q1
2008

Q2

Q3

Q4

Q1
2009

Year and end of quarter
Citigroup
Bank of America
JPMorgan Chase
Wells Fargo
Source: GAO analysis of data from Consolidated Financial Statements for Bank Holding Companies, FR Y-9C from First Quarter 2007
through First Quarter 2009, Board of Governors of the Federal Reserve System. .

A different measure of capital adequacy is the tier 1 leverage ratio. 6 Using
this measure, Citigroup had the lowest ratio for the entire period
compared with the other three bank holding companies. Citigroup’s tier 1
leverage ratio ranged from a low of about 4 percent in the fourth quarter of
2007 to a high of just over 6.6 percent in the first quarter of 2009. In the
third quarter of 2008 and before TARP funding, Bank of America,
JPMorgan Chase, and Wells Fargo reported their tier 1 leverage ratio as 5.5
percent, 7.2 percent, and 7.5 percent, respectively, while Citigroup
reported a tier 1 leverage ratio of 4.7 percent as show in figure 13.

6

Tier 1 leverage ratio is tier 1 capital divided by average total assets for leverage capital
purposes.

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Appendix V: Synopsis of Citigroup’s Financial
Condition

Figure 13: Tier 1 Leverage Capital Ratio of the Four Largest Bank Holding Companies, First Quarter of 2007 through First
Quarter of 2009
Ratio
15

12

9

6

3

0
Q1

Q2

Q3

Q4

2007

Q1
2008

Q2

Q3

Q4

Q1
2009

Year and end of quarter
Citigroup
Bank of America
JPMorgan Chase
Wells Fargo
Source: GAO analysis of data from Consolidated Financial Statements for Bank Holding Companies, FR Y-9C from First Quarter 2007
through First Quarter 2009, Board of Governors of the Federal Reserve System. .

In addition to capital, a bank holding company has a cushion against
losses in its “allowance for loan and lease losses” (ALLL), which must be
maintained by the bank holding company to cover expected losses in its
loan and lease portfolio. 7 For Citigroup and the other three companies, we
examined the data on assets that already reflected repayment problems
(“nonaccrual loans” plus “other real estate owned”) and compared this to
the companies’ tier 1 capital plus ALLL. 8 The data for the first quarter 2007
through the first quarter 2009 are shown in figure 14. Throughout this

7

For loans that a bank holding company intends to hold for the foreseeable future until
maturity or payoff, the allowance for loan and lease losses is the amount it maintains to
cover estimated credit losses.
8

Nonaccrual loans are loans for which payment in full of interest or principal is not
expected. “Other real estate owned” is the value of all real estate other than premises
actually owned by the bank holding company or its consolidated subsidiaries. This includes
real estate acquired in satisfaction of debts previously contracted.

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Appendix V: Synopsis of Citigroup’s Financial
Condition

period, Citigroup’s assets with repayment problems as a percentage of this
cushion was consistently higher than that of the other three bank holding
companies.
Figure 14: Selected Problem Assets as a Percentage of Tier 1 Capital and Loan
Loss Allocation, First Quarter of 2007 through First Quarter of 2009
Percentage
20

15

10

5

0
Q1
Q2
2007
Year and quarter

Q3

Q4

Q1
2008

Q2

Q3

Q4

Q1
2009

Bank of America
Wells Fargo and Company
JPMorgan Chase and Company
Citigroup
Source: GAO analysis of data from Consolidated Financial Statements for Bank Holding Companies, FR Y-9C from
First Quarter 2007 through Third Quarter 2008, Board of Governors of the Federal Reserve System.

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Appendix VI: GAO Contacts and Staff
Acknowledgments

Appendix VI: GAO Contacts and Staff
Acknowledgments
GAO Contacts

Richard J. Hillman, (202) 512-8678 or hillmanr@gao.gov
Thomas J. McCool, (202) 512-2642 or mccoolt@gao.gov
Orice Williams Brown, (202) 512-8678 or williamso@gao.gov

Staff
Acknowledgments

In addition to the contacts named above, Nikki Clowers, Gary Engel, and
William Woods (Lead Directors); Cheryl Clark, Lawrence Evans Jr.,
Barbara Keller, Carolyn Kirby, Kay Kuhlman, Karen Tremba, and Katherine
Trimble (Lead Assistant Directors); and Marianne Anderson, Noah
Bleicher, Benjamin Bolitzer, Angela Burriesci, Emily Chalmers, Michael
Derr, Rachel DeMarcus, M’Baye Diagne, Abe Dymond, Patrick Dynes,
Nima Edwards, Nancy Eibeck, Karin Fangman, Ryan Gottschall, Brenna
Guarneros, Heather Halliwell, Michael Hoffman, Joe Hunter, Tyrone
Hutchins, Elizabeth Jimenez, Jamila Jones Kennedy, Jason Kirwan,
Christopher Klisch, Steven Koons, Rick Krashevski, John Krump, Jim
Lager, Rob Lee, John Lord, Matthew McDonald, Sarah McGrath, Susan
Michal-Smith, Marc Molino, Tim Mooney, Jill Namaane, Joseph O’Neill,
Ken Patton, Josephine Perez, Omyra Ramsingh, Mary Reich, Rebecca
Riklin, LaSonya Roberts, Susan Sawtelle, Chris Schmitt, Raymond
Sendejas, Jeremy Swartz, Maria Soriano, Cynthia Taylor, John Treanor,
and Jason Wildhagen made important contributions to this report.

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Related GAO Products

Related GAO Products

Auto Industry: Summary of Government Efforts and Automakers’
Restructuring to Date. GAO-09-553. Washington, D.C.: April 23, 2009.
Small Business Administration’s Implementation of Administrative
Provisions in the American Recovery and Reinvesment Act.
GAO-09-507R. Washington, D.C.: April 16, 2009.
Troubled Asset Relief Program: March 2009 Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-504. Washington, D.C.:
March 31, 2009.
Troubled Asset Relief Program: Capital Purchase Program Transactions
for the Period October 28, 2008 through March 20, 2009 and
Information on Financial Agency Agreements, Contracts, and Blanket
Purchase Agreements Awarded as of March 13, 2009. GAO-09-522SP.
Washington, D.C.: March 31, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-539T. Washington,
D.C.: March 31, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-484T. Washington,
D.C.: March 19, 2009.
Federal Financial Assistance: Preliminary Observations on Assistance
Provided to AIG. GAO-09-490T. Washington, D.C.: March 18, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-474T. Washington,
D.C.: March, 11, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-417T. Washington,
D.C.: February 24, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-359T. Washington,
D.C.: February 5, 2009.
Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues. GAO-09-296. Washington, D.C.:
January 30, 2009.

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GAO-09-658 Troubled Asset Relief Program

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High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22,
2009.
Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. GAO-09-266T.
Washington, D.C.: December 10, 2008.
Auto Industry: A Framework for Considering Federal Financial
Assistance. GAO-09-247T. Washington, D.C.: December, 5, 2008.
T

Auto Industry: A Framework for Considering Federal Financial
Assistance. GAO-09-242T. Washington, D.C.: December 4, 2008.
T

Troubled Asset Relief Program: Status of Efforts to Address Defaults and
Foreclosures on Home Mortgages. GAO-09-231T. Washington, D.C.:
December 4, 2008.
T

Troubled Asset Relief Program: Additional Actions Needed to Better
Ensure Integrity, Accountability, and Transparency. GAO-09-161.
Washington, D.C.: December 2, 2008.

(250432)

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GAO-09-658 Troubled Asset Relief Program

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